Dec. 17 (Bloomberg) -- The Australian dollar headed for its first weekly gain in three amid optimism gains in the price of coal, the country's biggest export, will trigger increased demand for the local currency to buy the fuel.

Australia is the world's largest producer of coal. Japanese steelmakers agreed this week to pay more than twice as much for a metric ton of coking coal in 2005-2006 than it currently does to Melbourne-based BHP Billiton.

``This is a very large increase in the price of Australia's single largest export,'' said Alex Schuman, manager of foreign- exchange strategy at Commonwealth Bank of Australia in Sydney. ``This provides another reason to expect the currency to rise over the coming six months''

The Australian dollar bought 75.77 U.S. cents at 11 a.m. in Sydney from 74.7 cents a week ago. The currency fell 0.8 percent from yesterday after the U.S. current account grew less than many economists forecast in the third quarter.

The Australian dollar will rise to 80 cents by the end of the first quarter and 82 cents by the middle of next year, said Schuman. Commonwealth Bank is the nation's second-biggest lender.

$125 A Ton

Officials at Nippon Steel Corp. and Sumitomo Metal Industries Ltd., who declined to be identified, said Dec. 13 they agreed to pay BHP about $125 a metric ton for coking coal next year compared with $56 a ton in 2004-2005. Annual price negotiations in Japan set the global benchmark for the price of coal.

``These negotiations are leaving some in the market, including ourselves, more optimistic on the value of Australia's commodity exports,'' said Robert Rennie, chief currency strategist at Westpac Banking Corp. in Sydney. ``The Australian dollar should'' rise.

The Australian Bureau of Agricultural & Resource Economics in Canberra forecast Dec. 13 the country will export A$9.9 billion ($7.5 billion) of coking coal in 2004-2005 and A$6.3 billion of thermal coal, up 34 percent and 42 percent respectively, from overseas sales of the fuel in the 12 months ended June 30, 2004.

Global coal demand has risen ever year since 1999 with the fuel accounting for about a quarter of the world's energy use.

Raw materials account for about two-thirds of Australia's exports which in turn make up about a fifth of the economy.

The country is also the largest global supplier of iron ore, alumina and zinc. The Goldman Sachs Industrial Metal Index has risen 19 percent this year amid rising demand for raw materials from China.

Australian government bonds fell for the first day this week. The 6.25 percent bond maturing in April 2015 dropped 0.619, or A$6.19 per A$1,000 face amount, to 108.266. The yield gained 7 basis points to 5.2 percent. A basis point is 0.01 percentage point.

Equities

Australia's dollar also rallied this week on buying of local stocks by overseas investors, said Schuman.

Australia's S&P/ASX 200 Index rose to a record close yesterday, led by miners and energy producers such as BHP Billiton and Woodside Petroleum Ltd.

The index has climbed 20 percent this year compared to an 8.6 percent gain of the U.S. Standard & Poor's 500 index. A report this week showed overseas investors bought U.S. assets, including stocks and bonds, at the slowest pace in a year.

``We've seen a lot of accounts buying Australian dollars to buy Australian resource stocks as a proxy to Asian industrial growth,'' said Schuman. ``It's very rare we see such a strong inflow into stocks from offshore but the neatest way to buy into Chinese industry is buy an Australian miner.''

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

Last Updated: December 16, 2004 19:12 EST