Sept. 24 (Bloomberg) -- Australia's dollar fell, poised for its second weekly loss on speculation investors abroad will shift funds away from government bonds and bank deposits denominated in the currency as U.S. interest rates rise.

The currency declined this week as the gap between the Australian and U.S. key interest rate shrank to the smallest in almost four years after the U.S. Federal Reserve raised borrowing costs an 11th straight time. The Australian dollar has weakened 2.5 percent this year as the Fed has lifted its key rate six times, compared with one advance by the Reserve Bank of Australia.

``The Australian dollar lacks momentum primarily because of the interest rate differential, which is narrowing,'' said Beat Lenherr, Singapore-based chief investment office at LGT Bank in Liechtenstein. ``We see more hikes in the U.S. narrowing the interest rate gap, which will definitely cap it.''

The Australian dollar slid to 75.72 U.S. cents in late New York yesterday from 76.75 cents a week ago, a drop of 1.4 percent.

The currency will drop to 74 to 75 cents within two weeks, Lenherr forecast.

The Fed this week raised its key rate for overnight lending between banks a quarter percentage point to 3.75 percent, the highest in four years, and repeated a plan to make further increases at a ``measured'' pace. Australia's Reserve Bank kept its rate at 5.5 percent on Sept. 7.

Investors earn a yield premium of 1.19 percentage points for holding two-year Australian government bonds over like-maturity U.S. Treasury notes, down from 1.98 percentage points at the start of the year. The gap has averaged 2.12 points in the past five years.

`Difficult To Get Bullish'

``It's quite difficult to get bullish on the Australian dollar when the U.S. dollar is rising on interest-rate differentials,'' said Greg Gibbs, a currency strategist at RBC Capital Markets in Sydney. Investors should sell the currency next week, he said.

Australian government bonds were little changed this week. The yield on the 10-year bond was steady at 5.17 percent from a week ago. The price of the benchmark 6.25 percent bond maturing in April 2015 fell 0.020, or 20 cent per A$1,000 face amount, to 107.975. Bond yields move inversely to price.

`Nervous'

Losses in the Australian dollar were limited this week by a rally in the price of gold, copper and other commodities. The country earns about 10 percent of its economic output from selling raw materials overseas.

Prices of gold futures for December delivery on the Comex division of the New York Mercantile Exchange this week reached $479, the highest since January 1988. Australia is the world's third-largest supplier of the metal.

Copper gained 6.6 percent this week in New York, the most in almost three months, on speculation that damage caused by the U.S. hurricanes may lead to a surge in demand.

``While markets are obviously selling the Australian dollar, copper and gold are doing well, which leaves me nervous about being aggressively negative'' on the currency, said Robert Rennie, chief currency strategist at Westpac Banking Corp. in Sydney. ``I continue to like selling the Australian dollar, but not here and not now.'' Investors should sell the currency on any rally to 77.50 cents, he said.

Charts

The Australian dollar yesterday posted its biggest decline this month after it dropped below a key level on charts traders use to predict price movements.

Losses accelerated after the currency fell below 76.78 cents. The level is the midpoint of a decline from a one-year high on March 9 to an eight-month low on July 7, based on a series of numbers known as the Fibonacci sequence.

``The Australian dollar has come under a bit of pressure after it fell through a big level,'' said Alex Sinton, an Auckland-based senior dealer at ANZ Investment Bank.

In technical analysis, investors and analysts study charts of trading patterns and prices to forecast changes in a security, commodity, currency or index. Some traders use Fibonacci levels as an indicator of support, where they expect buying, or resistance, where they expect selling.

To contact the reporter on this story: Chris Young in Sydney at cyoung12@bloomberg.net.

Last Updated: September 23, 2005 20:00 EDT