June 30 (Bloomberg) -- The Australian dollar advanced following gains in the prices of metals the country exports.

Prices of Australian exports including copper, nickel and aluminum rose yesterday after the U.S. said its economy grew at a quicker pace in the first quarter than previously estimated and the price of oil fell. The currency dropped as much as 2 percent in the past week as commodities plunged.

``The two-week, 2-cent decline is over,'' said Craig Ferguson, a currency strategist at Australia & New Zealand Banking Group Ltd. in Melbourne. ``The commodity story led the way down for the Australian dollar, so now it looks like everything commodity-linked will go up.''

The currency climbed to 76.33 U.S. cents at 4:50 p.m. in Sydney, after earlier reaching a three-week low of 75.87 cents. It was at 76.18 cents lat in Asia yesterday. The Australian dollar is down 2.1 percent so far this year and headed for its first back-to- back quarterly decline since 2000.

Ferguson, who forecasts the currency will drop to 66 cents by the end of the year, said it will rally to 77 cents to 77.5 cents in the next week as copper, gold and nickel rise.

Shipments from Australia, the world's largest exporter of iron ore and nickel, helped narrow the country's trade deficit by half in April. Exports contribute 20 percent to the economy.

Copper futures for September delivery yesterday climbed 0.8 cent, or 0.5 percent, to $1.562 a pound on the Comex division of the New York Mercantile Exchange after the U.S. reported its economy grew at a 3.8 percent annual pace in the first quarter, compared with the previous government estimate of 3.5 percent.

Retail Sales

The Australian dollar and copper had a correlation of 0.85 in the past three years. A reading of 1 suggests the two move lock step. Australia is the fourth-biggest supplier of the metal.

The Australian dollar may extend gains on speculation a government report released tomorrow will show a rebound in retail sales, said Singapore-based Sabrina Jacobs, a currency strategist at Dresdner Kleinwort Wasserstein.

Retail sales probably rose 0.4 percent in May following a 0.5 percent decline in April, according to the median forecast of 20 economists surveyed by Bloomberg News.

Credit provided to Australian consumers and businesses by banks and other financial institutions rose 1 percent in May from April, a report released by the Reserve bank of Australia today.

Fourteen of 22 economists surveyed by Bloomberg News expect the Reserve Bank of Australia to keep its target for overnight lending between banks at 5.5 percent for the rest of the year. Seven anticipate an increase and one a reduction.

``The economic data flow remains OK and in line with interest rates remaining unchanged,'' said Jacobs. ``Short-term, the Australian dollar looks supported, especially with the recovery in metals. We like buying dips.''

Gains on the day will probably be limited to 76.50 cents with a year-end target of 79 cents, Jacobs said.

Narrowing Rate Advantage

The currency's rally may stall because of expectations the country's interest-rate advantage over the U.S. will narrow. The Federal Reserve is expected to raise interest rates later today and signal further increases will be needed.

Fed policy makers will lift their key rate by a quarter percentage point for a ninth straight time to 3.25 percent, according to the median estimate of 93 economists surveyed by Bloomberg News.

The move would shrink Australia's interest-rate advantage to 2.25 percentage points, the narrowest since October 2001. Higher interest rates partly helped the Australian dollar to rally 35 percent in the past three years against the U.S. currency.

`Reluctant to Buy'

``A likely hawkish leaning Fed statement leaves us reluctant to buy the Australian dollar,'' said John Kyriakopoulos, a currency strategist at National Australia Bank Ltd. in Sydney. It will drop to 74.5 cents in the next month, he said.

Investors should buy the Australian dollar before the Fed's interest rate decision, said Nick Waite, head of foreign exchange trading at Citigroup Global Markets in Sydney. The currency may trade as high as 77.25 cents, he said.

The yield on the 10-year Australian government bond was little changed at 5.11 percent, 1.11 percentage points more than like-dated U.S. Treasuries. The difference has averaged 1.21 points in the past year.

The 6.25 percent bond maturing in April 2015 fell 0.01, or 10 cents per A$1,000 face amount, to 108.816. Bond yields move inversely to price.

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

Last Updated: June 30, 2005 03:13 EDT