July 5 (Bloomberg) -- Copper rose in London amid optimism that a possible pause in U.S. interest rate increases may help boost demand for metals. Nickel and zinc also advanced.

The Fed last week said further increases would depend on the inflation outlook, a less hawkish stance that encouraged investors to return to commodity markets after exiting on concern rising global interest rates would slow growth and curb metals demand. A weaker U.S. dollar also encouraged buying of base and precious metals, said Sucden (UK) Ltd. analyst Jeremy Goldwyn.

``It certainly was a reaction to the expectation that we might be nearing the top of the interest rate cycle,'' said Goldwyn global head of industrial commodities at Sucden in London. ``Everyone breathed a sigh of relief.''

Copper for delivery in three months on the London Metal Exchange rose $75, or 1 percent, to $7,485 a metric ton at 11:56 a.m. in London. The metal has dropped 15 percent from a record $8,800 a metric ton on May 11.

Concerns about inflation ``did scare away some of the speculators from the market,'' said Jim Lennon, an analyst in London at Macquarie Bank Ltd. Gains in the first 4 1/2 months of the year, helped by investment fund buying, were ``probably somewhat excessive in relation to the fundamentals,'' he added.

Copper inventories monitored by the LME fell 250 tons to 93,150 tons today. Stockpiles have slumped 16 percent since June 1, according to Bloomberg data.

Evy Hambro, who manages the $6.6 billion World Mining Fund at Merrill Lynch Investment Managers, doesn't see any ``significant cooling of the economy'' in China down to levels that will greatly affect demand, because inventory levels are still very low.

`Exceptionally Tight'

``Markets are exceptionally tight and that's why prices are trading at such high levels,'' he said.

Copper consumption in China, the world's largest user of the metal, was down 6.4 percent in the first quarter, International Copper Study Group said June 27.

Among other LME metals, zinc gained $70 to $3,370 a metric ton, aluminum rose $19 to $2,610, lead added $11 to $1,025 and tin advanced $125 to $8,450.

Nickel gained $225 to $22,775 a ton after stockpiles declined 1.5 percent to 9,258 tons, taking the drop since the beginning of June to 49 percent. Nickel reached a record high of $23,050 a ton on May 26.

``We are now starting to see a base being formed in the markets based on the fundamentals, which still remain extremely tight,'' said Lennon.

The three biggest stainless steel producers in China, which account for more than half the nation's output, agreed to cut production by 20 percent this month to curb the use of nickel, which is near a 19-year high.

Nickel Back

Shanxi Taigang Stainless Steel Co., Baoshan Iron & Steel Co.'s Ningbo Baoxin unit and Seoul-based Posco's stainless unit cut supply of cold-rolled stainless steel by 120,000 tons for a month from July 1, Hu Liang, manager at Posco's cold-rolled steel unit said by phone from eastern Jiangsu province today.

``Nickel prices are too high, and we want to reduce supplies to the market to damp demand,'' Hu said. ``The 20 percent output cut will be valid for at least this month, and we may decide later whether to continue, depending on nickel prices,'' he said.

To contact the reporter on this story: Katy Watson in London at kwatson@bloomberg.net

Last Updated: July 5, 2006 07:13 EDT