Australian Dollar Climbs From 3-Month Low on Rate Advantage

The Australian dollar rose from a three-month low as some traders considered its drop too far as the economy expands and the central bank raises interest rates to an 11-year high.

The currency is headed for the biggest annual advance since 2003 as investors bet the Reserve Bank of Australia will increase rates next year, according to a Credit Suisse Group index based on trading in interest rate swaps. Australia's rate advantage over the U.S. is at a more-than-two-year high of 2.5 percentage points as the Federal Reserve cuts borrowing costs.

``The currency was a little bit oversold on Friday so it's rebounding,'' said Richard Grace, chief currency strategist at Commonwealth Bank of Australia in Sydney. ``The local economy is still strong.''

The Australian dollar climbed to 86.37 U.S. cents at 1:49 p.m. in Sydney after earlier reaching 85.96 cents, the lowest since Sept. 20. It was at 86.07 cents late in New York last week and may rise as high as 88.50 cents this week, Grace said. Australia's dollar gained to 97.78 yen from 97.50 yen late on Dec. 14.

The currency reached a 23-year high last month after the Reserve Bank of Australia raised the cost of borrowing to 6.75 percent. Australian two-year bonds yield 3.50 percentage points more than the equivalent U.S. Treasuries. The spread was 1.40 percentage points at the beginning of the year.

Traders' bets that a rate increase next year is a done deal ``is providing some support to the Australian dollar,'' said John Kyriakopoulos, a currency strategist at National Australia Bank Ltd. in Sydney.

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