Oct. 20 (Bloomberg) -- New Zealand's dollar is the world's best-performing most-actively traded currency this week on speculation the central bank will raise interest rates from a record high.

The currency has climbed 3.5 percent since Reserve Bank of New Zealand Governor Alan Bollard said Sept. 14 he was ``less confident'' borrowing costs wouldn't have to rise because inflation isn't abating. Though gains in consumer prices probably slowed in the third quarter, they remain outside the upper-end of the central bank's target, a Bloomberg survey shows.

``Inflation risks are skewed to the upside,'' said Jason Wong, director of economics and strategy at First NZ in Wellington. ``With even-higher interest rates, the New Zealand dollar is likely to remain stronger for longer.''

New Zealand's currency gained 1.6 percent this week to 66.77 U.S. cents at 3:46 p.m. in Wellington from 65.75 cents in New York Oct. 13. It earlier reached 66.94 cents, the highest in more than three weeks.

Consumer prices rose 3.6 percent from a year earlier in the third quarter, slowing from 4 percent in the prior three months, according to the median forecast of 13 economists surveyed by Bloomberg. The report is due on Oct. 25. Governor Bollard is required to keep inflation between 1 percent and 3 percent.

Four banks, including Deutsche Bank AG and First NZ Capital Ltd. have changed their interest-rate views in the past week and now predict a rate increase. Seven of 15 economists surveyed by Bloomberg forecast a quarter-percentage point rise to 7.5 percent when policy makers meet Oct. 26.

Bond Yield Premium

The yield premium that New Zealand's bonds offer over counterparts in the U.S. and Europe helped the currency advance 7.4 percent last quarter, the top performer among the world's most actively traded currencies.

New Zealand three-year government bonds yield 1.83 percentage points more than similar-maturity U.S. Treasuries, compared to an average 1.42 percentage points in the past six months. They give an extra 2.93 percentage point over German bunds.

``The yields in New Zealand are still very attractive, which is underlying support for the currency,'' said Nick Bennenbroek, vice president of foreign-exchange research at Brown Brothers Harriman & Co. in New York.

The yield on New Zealand three-month bank bill futures has risen to 7.72 percent from 7.58 percent two weeks ago as traders increase bets of a rate increase by the end of the year.

Stop Losses Triggered

New Zealand's dollar also gained as the U.S. currency fell the most in four weeks against the euro and the yen after a report showed manufacturing in the Philadelphia region unexpectedly contracted for a second month in October.

The Fed Bank of Philadelphia's general economic index fell to minus 0.7 this month from minus 0.4 in September, which was the first contraction in the gauge since April 2003. Readings below zero signal a decline.

``The Philadelphia Fed headline was disappointing and we got the biggest move of the week as far as the U.S. dollar was concerned,'' Bennenbroek said.

The New Zealand dollar's rise was exaggerated as stop losses were set above 66.60 cents, Bennenbroek said. ``Those technical levels being triggered and the weak U.S. dollar were factors behind the New Zealand dollar's gain,'' he said. Investors place such orders in case their bets go the wrong way.

First NZ's Wong said the economy is growing faster than Bollard expected, business and consumer confidence have recovered as fuel prices fall, and the housing market is buoyant, fanning inflation.

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

Last Updated: October 19, 2006 22:50 EDT