Aussie, Kiwi Dollars Advance as Italy Budget Measures Boost Yield Demand

The Australian and New Zealand dollars rose after Italy’s Cabinet approved austerity and growth measures before a summit on Europe’s debt crisis, supporting demand for riskier assets.

New Zealand’s currency was 0.6 percent from a three-week high against the yen before a report today forecast to show services industries in the U.S. expanded in November. Gains in the so-called Aussie may be limited on speculation the Reserve Bank of Australia will cut interest rates when it meets tomorrow.

“We’re seeing some improvement in sentiment” on Italy’s austerity plan, said Emma Lawson, a currency strategist at National Australia Bank Ltd. in Sydney. “We’ll be watching data and announcements heading into the European meeting. We’re neutral” on the Aussie and kiwi this week, she said.

Australia’s dollar advanced 0.1 percent to $1.0228 as of 2:11 p.m. in Sydney from last week in New York. The currency fetched 79.74 yen from 79.67 yen on Dec. 2. New Zealand’s currency strengthened 0.1 percent to 77.81 U.S. cents. The so- called kiwi dollar traded at 60.67 yen from 60.61 yen on Dec. 2, when it touched 61.12 yen, the highest since Nov. 14.

Italian Prime Minister Mario Monti announced 30 billion euros ($40 billion) of austerity and growth measures yesterday, a day earlier than planned, as he seeks to cut the euro-region’s second-biggest debt and prevent a breakup of the euro. He will present the package, which includes more than 12 billion euros in spending cuts, to both houses of parliament today.

German Chancellor Angela Merkel and French President Nicolas Sarkozy will meet before the European Union summit this week in an attempt to bridge differences on a crisis resolution.

U.S. Data

The Institute for Supply Management’s index for services industry in the U.S. rose to 53.8 last month from 52.9 in October, according to the median forecast of economists surveyed by Bloomberg News before the Tempe, Arizona based-group’s report.

“We have seen improvement in U.S. economic data across the board, so we expect that to continue,” said NAB’s Lawson. “That should help confidence in the global economy and help” currencies such as the Aussie and kiwi.

Gains in the Australian dollar were limited after a private report showed the country’s annual inflation rate fell to a two- year low in November.

Australia’s Inflation

Consumer prices in Australia rose 2.1 percent last month from a year earlier, compared with a 2.6 percent annual gain in October, according to an index compiled by TD Securities Inc. and the Melbourne Institute released in Sydney today.

Australia’s central bank aims to hold annual inflation in a 2 percent to 3 percent range.

“Odds have shortened for” a 25 basis points cut by the RBA tomorrow, Besa Deda, chief economist at St. George Bank Ltd. in Sydney, wrote in a research note today. “Soft patches in the domestic economy are yet to make a marked recovery.”

Australia’s benchmark rates will drop to 4 percent next year, Deda forecast.

A Credit Suisse Group AG index based on swaps shows an 87 percent chance Reserve Bank’s cash rate will be cut from 4.5 percent to 4.25 percent.

Higher rates in Australia and New Zealand, compared with as low as zero in the U.S. and Japan, attract investors to the South Pacific nations’ higher-yielding assets. The risk in such trades is that currency market moves will erase profits.

New Zealand’s official cash rate is 2.5 percent. The Reserve Bank of New Zealand holds a policy meeting on Dec. 8.

The nation’s two-year swap rate, a fixed payment made to receive floating rates which is sensitive to interest-rate expectations, was unchanged at 2.88 percent.

Australia’s government bonds advanced, with yields on the 10-year debt falling two basis points to 3.98 percent.

To contact the reporter on this story: Mariko Ishikawa in Tokyo at mishikawa9@bloomberg.net;

To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net

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