By Candice Zachariahs and Lisa Pham

July 29 (Bloomberg) -- The New Zealand dollar fell for a third day as the central bank said deteriorating prospects for growth will slow the pace of future interest-rate increases after it raised the benchmark for a second month.

The kiwi slid against all its 16 major counterparts after Governor Alan Bollard said the “pace and extent” of future rate increases would be more moderate than projections he made in June. The Australian currency advanced for the first day in three versus the greenback as U.S. equity futures rose and Australia’s benchmark index pared declines, boosting demand for higher-yielding assets.

“Their statement is more dovish than in June and the market largely expected it to be unchanged,” said Imre Speizer, a market strategist in Wellington with Westpac Banking Corp. “The kiwi dollar is being sold on that.”

New Zealand’s dollar dropped 0.5 percent to 72.39 U.S. cents as of 2:27 p.m. in Wellington and declined 0.7 percent to 63.15 yen from yesterday in New York. Australia’s currency rose to 89.60 cents from 89.32 after earlier reaching 89.06 cents, the lowest since July 23. It bought 78.14 yen from 78.12 yen.

New Zealand’s benchmark interest rate of 3 percent compares to 4.5 percent for Australia and levels of 0.1 percent in Japan and as low as zero in the U.S., attracting investors to the South Pacific nations’ higher-yielding assets. The risk in such trades is that currency market moves will erase profits.

N.Z. Trade

“We’re likely to see further hikes in the next few meetings before consideration of a pause,” said Speizer, who expects the currency to find buyers toward 71.60 cents.

The kiwi dollar has gained 4.7 percent against the U.S. currency over the past month as investors bet on further rate increases. Swaps traders expect the Reserve Bank of New Zealand to raise its key rate by 89 basis points over the next year, a Credit Suisse AG index shows.

The currency’s recent gains are “inconsistent with the softening in New Zealand’s economic outlook and moderation in our export commodity prices,” Bollard said.

The RBNZ “did talk about higher growth for their trading partners than what they had forecast but they see risks to that growth,” said Alex Sinton, a senior dealer at ANZ National Bank Ltd. in Auckland. Policy makers “are waiting for further signs to make sure they progress in the right direction.”

Yields, Stocks

New Zealand’s two-year swap rate, a fixed payment made to receive floating rates, fell to 4.08 percent from 4.17 percent yesterday.

The Australian dollar erased an earlier decline against the greenback as futures for the Standard & Poor’s 500 Index signaled stocks in the U.S. will end two days of losses. The 120-day correlation between the Aussie-U.S. dollar and the S&P 500 futures was at 0.848 today. A correlation of 1 would mean they move in lockstep.

“The correlation between the U.S. equity market, our local benchmark index and the Aussie dollar is pretty strong recently,” said David Taylor, a market analyst at CMC Markets Ltd. in Sydney. “Equities turned a bit of a corner and the Aussie has probably followed equity markets up.”

Australian bond futures were little changed with the 10- year contract for September delivery at 94.775 on the Sydney Futures Exchange from 94.79 yesterday. The implied yield on the futures stood at 5.225 percent.

--Editors: Garfield Reynolds, Nicholas Reynolds.

To contact the reporter on this story: Candice Zachariahs in Sydney at czachariahs2@bloomberg.net Lisa Pham in Sydney at lpham14@bloomberg.net.

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