Feb. 18 (Bloomberg) -- Australia's dollar fell more than any other currency against the U.S. dollar after central bank Governor Ian Macfarlane said economic growth has slowed.

The currency is up 0.5 percent this year on expectations the Reserve Bank of Australia will increase its benchmark interest rate from 5.25 percent for the first time in more than a year. Macfarlane's comments to a parliamentary committee in Sydney reduced speculation the bank will lift its rate more than once.

``From the Australian dollar's point of view the market is now less convinced we'll see back to back rate hikes in March and April,'' said Robert Rennie, chief currency strategist at Westpac Banking Corp. in Sydney. ``This has caused a bit of selling.''

The currency dropped 0.4 percent to 78.45 U.S. cents as of 2:29 p.m. in Sydney. Westpac forecasts the currency will buy 78 cents by the end of the first quarter and 68 cents by yearend.

Economic growth in the fourth quarter wasn't ``much more than 2 percent,'' Macfarlane said. The central bank previously forecast an expansion of 3.75 percent.

Growth was slowed by capacity constraints in the rail and mining industries, which have hampered Australian exports of coal and metals to booming economies such as China, Macfarlane said.

At the same time, rates are ``more likely to go up than down,'' he said, repeating a forecast made in the central bank's monetary policy statement on Feb. 7.

Scaling Back

Futures trades pared bets the central bank will raise its overnight cash rate target of 5.25 percent after Macfarlane's comments. The yield on the June 90-day bank bill interest-rate futures contract fell 4 basis points to 5.79 percent. Still, the contract's yield has advanced 20 basis points in the past month. A basis point is 0.01 percentage point.

The contract settles to a three-month lending rate that has averaged 12 basis points, or 0.12 percentage point, more than the Reserve Bank's cash rate in the past five years. A futures contract is an agreement to sell or buy a certain amount of a commodity or security at a specific price and time.

``Macfarlane is telling us that Australia's relative growth advantage of recent years won't be with us for the next couple of years,'' said John Kyriakopoulos, a currency strategist at National Australia Bank Ltd. in Sydney. ``This is not good for the currency.'' National Australia Bank forecasts the Australian dollar will decline to 73 cents by the middle of the year.

The economy grew an annual 3 percent in the third quarter, from 4.5 percent in the prior three months. By comparison, U.S. annual growth was 4 percent in the three months ended Sept. 30.

Commodities

Some strategists, such as Claudio Piron at JPMorgan Chase & Co., said the Reserve Bank of Australia will raise interest rates by half a percentage point by June and that will still spur buying of the Australian dollar.

``That should play into the hands of the Australian dollar, which will rise to 81 U.S. cents in the second quarter and 82 cents in the third,'' said Singapore-based Piron. ``Higher commodity prices are an additional factor supporting the currency.''

Australia's dollar is typically influenced by the prices of commodities such as gold and copper that the country exports as overseas sales contribute about a fifth to gross domestic product.

The price of copper rose to a near 16-year high yesterday and gold is close to a six-week high.

The Australian dollar and gold, of which the country is the world's third biggest producer, had a correlation of 0.86 in the past six months. A figure of 1 suggests the two move lock-step.

Premium

Australian government bonds rose. The 6.25 percent bond due in April 2015 climbed 0.191, or A$1.91 per A$1,000 face amount, to 106.522. Its yield rose 3 basis points to 5.40 percent.

The premium investors earn from holding Australian 10-year bonds above U.S. Treasury notes of like maturity narrowed 3 basis points to 1.22 percentage points. The gap has averaged 1 percentage point in the past five years.

``Macfarlane is being less hawkish than people expected,'' said David Mozina, head of foreign-exchange strategy at ABN Amro Holding NV in Sydney. ``The market has priced in two rate hikes and the central bank needs to undo some of that damage'' so the Australian currency will weaken to 78 cents today, he said.

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

Last Updated: February 17, 2005 22:29 EST