June 7 (Bloomberg) -- The New Zealand dollar rose to a 22- year high after a surprise interest-rate increase and the Australian dollar climbed on a gain in employment, boosting returns for traders borrowing yen to buy the currencies.

New Zealand's currency, known as the kiwi, advanced after the central bank raised its benchmark rate to 8 percent, spurring so-called carry trades. Australia's dollar, the Aussie, reached the highest since 1989 as jobs growth beat expectations, adding to pressure on policy makers to increase the 6.25 percent overnight cash rate.

``In an environment where investors are chasing outright yield, the Aussie and kiwi are the two outstanding options,'' said Sue Trinh, a currency strategist at RBC Capital Markets in Sydney. ``We're pretty bullish.''

New Zealand's dollar gained 0.8 percent to 75.60 U.S. cents at 5:11 p.m. in Wellington, from 75 cents late in Asia yesterday, and touched 75.68 cents, the highest since it was allowed to trade freely in March 1985. Australia's dollar rose 0.7 percent to 84.71 cents from 84.12 cents yesterday and reached 84.75 cents, the most since February 1989.

The kiwi may reach 75.75 cents today and the Aussie could gain to 84.80 cents, said Trinh, who is forecasting both currencies to advance at least another 5 percent.

Three successive quarter-point increases by the Reserve Bank of New Zealand this year have helped lift the currency 7.4 percent, with investors attracted to the second-highest rates among AAA-rated countries after Iceland.

`Hikes By Year End'

Australia's dollar rose as the economy added 39,400 jobs in May, pushing the jobless rate down to 4.2 percent, a 32-year low. Economists had expected a gain of 10,000 workers. That followed a report yesterday showing the economy grew the fastest in three-years in the first quarter.

``The RBA definitely should go again and for the RBNZ, the risk of another hike to 8.25 is very high as well,'' Trinh said. ``I do favor rate hikes from both of them by year-end.''

There's a 30 percent chance Bollard will increase New Zealand's rate again at the bank's next review on July 26, according to a Credit Suisse index based on overnight trading in interest-rate swaps. The same index has odds the Reserve Bank of Australia will raise rates next month at 42 percent.

Government bonds in the two nations declined, pushing the yield on New Zealand and Australia's two-year notes to the highest in seven years. Yields move inversely to prices.

``Kiwi rates rose as the RBNZ surprised and they were hawkish, making the currency even more attractive,'' said David Forrester, a foreign-exchange strategist at Barclays Capital in Singapore. ``Two days of strong data have put rate hikes firmly on the agenda in Australia.''

`Attractive for Japanese Investor'

New Zealand's two-year bond yield gained to 7.4 percent and Australia's equivalent advanced to 6.46 percent, both the highest since February 2000.

The yield spread between New Zealand and Japan's two-year bonds widened to 6.37 percentage points, the most in almost seven years. Australia's two-year yield advantage rose to 5.42 points, the widest in almost seven weeks.

Japan's benchmark rate of 0.5 percent has encouraged investors there to look overseas for higher yielding assets. That has helped the kiwi gain 29 percent against the yen over the past year, making it the best performer among the 16 most- actively traded currencies. The Australian dollar's 22 percent gain was the third best.

``The Aussie and kiwi are stable and that will always be attractive for the Japanese investor,'' said Tobias Davis, senior currency dealer at Custom House Global Foreign Exchange in Sydney. ``Both currencies will continue to rise against the yen.''

The kiwi gained 0.7 percent to 91.60 yen from 90.98 yen yesterday. It reached 91.77 yen June 5, a 17-year high. Australia's dollar advanced 0.8 percent to 102.60 yen from 101.82 yen and rose as high as 102.71, the most since April 1992.

To contact the reporter on this story: David McIntyre in Sydney at dmcintyre2@bloomberg.net

Last Updated: June 7, 2007 01:35 EDT