April 1 (Bloomberg) -- The Australian dollar had its biggest weekly gain in almost three months after government reports yesterday showed retail sales increased by more than twice what economists expected and building approvals rose from a five-year low.

Signs the economy is strengthening after growing at its slowest pace in four years in 2005 may spur speculation the Reserve Bank of Australia is more likely to raise interest rates than cut them, as central bank Governor Ian Macfarlane signaled Feb. 17. The currency has rebounded from an 18-month low three days ago amid rising prices of commodities the country exports.

``I'd buy the Australian dollar next week,'' said Richard Grace, senior currency strategist at Commonwealth Bank of Australia in Sydney. ``The data could continue to be stronger, which will generate a rally.''

Australia's currency bought 71.64 U.S. cents in late New York yesterday from 70.86 cents a week ago. It has gained 1.1 percent this week, the most since the week ended Jan. 6.

Retail sales rose 0.7 percent from January, when they gained a revised 0.9 percent, the most in seven months, the Australia Bureau of Statistics said in Sydney yesterday. The median forecast of 20 economists surveyed by Bloomberg News was for a 0.3 percent increase.

A separate report yesterday showed approvals to build private houses climbed 5.2 percent, the largest increase in nine months.

Credit provided to consumers and businesses jumped 1.4 percent, the largest increase in two years, a central bank report showed.

`Tightening Bias'

``Data show the Australian economy is robust and the RBA will keep a tightening bias,'' said David Forrester, a foreign- exchange strategist at Barclays Capital in Singapore. ``Data will help the Australian dollar rebound.''

The central bank has kept its overnight cash rate target at 5.5 percent for the past 13 months and hasn't cut it since November 2001.

``It is more likely that the next move in rates would be up rather than down,'' Macfarlane said in his twice-yearly testimony to a parliamentary committee in Canberra last month. ``It's far more likely upward pressure on inflation will prevail.''

Yields on December 90-day bank bill interest-rate futures contracts yesterday rose 5 basis points to 5.667 percent, indicating futures traders increased bets on the central bank raising borrowing costs. The contract settles at a three-month lending rate that has averaged 15 basis points above the Reserve Bank's cash rate target in the past year.

Trading Cheaply

The Australian dollar also gained as a jump in the prices of metals the country exports drives demand for the currency.

Westpac Banking Corp.'s commodity futures index, which tracks prices of raw materials Australia exports, has risen 3.5 percent this week to a record. Overseas shipments of raw materials account for more than 10 percent of the economy.

Copper has jumped 65 percent in the past year to a record. Gold rose to its highest since January 1981 and is up 12 percent this year. Australia is the fourth-largest producer of copper. Only South Africa mines more gold.

``I see the Australian dollar as a strong currency trading very cheaply,'' Jonathan Barratt, head of foreign exchange and metals at Tricom Futures Pty., said in Sydney. ``Australia is a commodity-based economy, so with stronger commodity prices the currency should do better.''

The Australian dollar posted a second quarterly loss, down 2.2 percent from the start of the year, as prospects of higher interest rates elsewhere in the world reduced the yield premium investors earn by holding government bonds.

The Federal Reserve March 28 pushed up its key lending rate a 15th straight time to 4.75 percent, shrinking Australia's rate advantage to the least since April 2001.

Shrinking Yield Gap

The yield gap between Australian and U.S. 10-year government bonds has contracted to 57 basis points from 81 basis points at the start of the year and an average of 94 basis points in the past year. A basis point is 0.01 percentage point.

``Strong commodity prices certainly do the Australian dollar no harm,'' said Sean Callow, a currency strategist at Westpac in Singapore. ``But as we have seen, yield spreads are far more potent for the Australian dollar.''

Investors should sell the currency on any increase above 72 cents, he said.

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

Last Updated: March 31, 2006 18:46 EST