Jan. 6 (Bloomberg) -- The Australian and New Zealand currencies surged to the highest since mid-1997 after Federal Reserve Governor Ben S. Bernanke downplayed concern about a low dollar and suggested U.S. interest rates will stay at a four-decade low in coming months.

The U.S. dollar's decline, which makes overseas goods more expensive for Americans to buy, shouldn't raise inflation expectations, Bernanke said this week in a speech to the American Economic Association. He said the risk of a dollar ``crisis'' is ``quite low.''

``That reinforces the notion that expected returns on U.S. dollar denominated assets is going to remain very low for the foreseeable future,'' boosting the appeal of higher yielding currencies, said Sue Trinh, a global currency strategist at Bank of New Zealand Ltd. `You can't rule out a move to 70 U.S. cents over the next couple of months'' for the New Zealand dollar.

Demand for the U.S. dollar has waned in the past year as interest rates in the U.S. fell to 1 percent, discouraging some investors from buying government debt sold to finance a record U.S. budget deficit.

The Australian dollar traded at 76.75 U.S. cents at 2.30 p.m. in Sydney, from 76.58 cents yesterday. It rose as high as 76.89 U.S. cents in U.S. trading, the highest since May 1997. New Zealand's dollar bought 67.00 U.S. cents at 4.30 p.m. in Wellington, having risen to 67.33 cents, its highest since July 10, 1997. It bought 66.79 U.S. cents in Asia yesterday.

Rates Gap

The Australian dollar rose 35 percent against the U.S. currency in the past 12 months, making it the best performer of the 16 major currencies tracked by Bloomberg data. Australia's benchmark interest rate at 5.25 percent is 4.25 percentage points more than the Federal Reserve's target interest rate, which helped fuel the currency's rally.

New Zealand's dollar has benefited for similar reasons; the benchmark rate is four percentage points above the Fed's target. The New Zealand currency had a 25 percent gain last year.

Twenty of 23 economists surveyed by Bloomberg News last month forecast Australia's central bank to increase interest rates a third time in the first quarter of 2004. The central bank's rate-setting board next meets on Feb. 3. It doesn't hold a meeting in January.

Seven of 13 economists surveyed by Bloomberg News last month expect the Reserve Bank of New Zealand to raise the benchmark interest rate a quarter point to 5.25 percent on Jan. 29. Five say the bank will wait until March and one says the rate will be unchanged until the second quarter.

Banks may borrow cash overnight from the Reserve Bank of New Zealand at 25 basis points more than the official cash rate and deposit cash at 25 basis points less.

Commodity Prices

The New Zealand and Australian currencies also benefited from a gain in commodity prices, said BNZ's Trinh.

The Reuters-Commodity Research Bureau Futures Price Index of 17 commodities including cotton, live cattle, copper and gold, surged 2.2 percent in New York trading yesterday, its biggest one-day gain since May 2000.

The two currencies tend to react to movements in commodity prices because of the reliance of their economies on the export of raw materials. Exports make up about a fifth of Australia's economy and about 30 percent of New Zealand's.

Australian bonds fell, pushing the 10-year yield up 5 basis points to 5.84 percent, the highest since Dec. 15.

New Zealand's 6.5 percent bond maturing April 2013 shed 0.150, or NZ$1.50 per NZ$1,000 face amount, to 102.838. The yield gained 2 basis point to 6.09 percent. A basis point is 0.01 percentage point.

Last Updated: January 5, 2004 23:09 EST