March 17 (Bloomberg) -- The Australian dollar headed for a winning week on speculation the country will sustain its interest-rate advantage as traders scale back bets on how much more the Federal Reserve will boost borrowing costs.

Australia's currency has rebounded from a 2006 low reached this week after a report yesterday showing U.S. consumer prices rose at a slower pace last month bolstered optimism U.S. rates won't rise much more. The gap between the two nation's interest rates is the lowest in almost 5 years.

``The Australian dollar should be doing better,'' said Stephen Koukoulas, chief Asia-Pacific strategist at TD Securities Ltd. in Sydney. ``The rate differential is still supportive.''

Australia's currency bought 73.51 U.S. cents as of 5 p.m. in Sydney from 73.70 cents in late Asian trading yesterday and 73.18 cents a week ago in New York.

The local dollar also has been supported this week by surveys showing business confidence is at a one-year high and consumer confidence is at a seven-month high, said Koukoulas, who forecasts the currency to rise to 77 cents in three months.

The Reserve Bank of Australia's overnight cash rate target is 5.5 percent, 1 percentage point more than the Fed's similar lending rate and the highest of any country with a top credit rating from Standard & Poor's.

Central Bank Governor Ian Macfarlane Feb. 17 said Australia's interest rates are unlikely to change.

Interest-rate futures show traders are certain the Fed will increase its benchmark to 4.75 percent on March 28. Traders see an 80 percent chance of an increase to 5 percent by July, down from 100 percent yesterday.

Enticed Investors

``It's hard to expect a fall in the Australian dollar when the market is thinking the Fed will tighten less,'' said Greg Gibbs, a currency strategist at ABN Amro Holding NV in Sydney.

The gap in yield between Australian 10-year government bonds and like-dated U.S. Treasuries widened yesterday to 72 basis points from 62 basis points at the start of the week. The difference was 61 basis points today and has averaged 97 basis points in the past year. A basis point is 0.01 percentage point.

``The move in the 10-year spreads has enticed some investors to buy longer-term bonds,'' said Warren Hogan, head of research at Australia & New Zealand Banking Group Ltd. in Sydney.

The yield on the 10-year bond fell 8 basis points, or 0.08 percentage point, to 5.28 percent. The price of the 6.25 percent bond maturing in April 2015 rose 0.592, or A$5.92 per A$1,000 face amount, to 106.95. Bond yields move inversely to price.

`Marked Down'

Gains in the Australian dollar have not been broad-based. A slide in New Zealand's currency helped drag the Australian dollar to its lowest in more than nine months against the euro and an almost three-week low versus the yen.

The New Zealand dollar is the worst-performing major currency this year on expectations slowing economic growth will spur a cut in interest rates. The currencies of Australia and New Zealand had a 0.99 correlation in the past five years. A reading of one suggests they move lock-step.

``The Australian dollar is being marked down by association with the New Zealand dollar,'' said Clifford Bennett, chief currency strategist at FxMax, a Sydney-based research company. ``Demand for higher yields will see it eventually strengthen.''

The Australian dollar traded at 0.6045 against the euro from about 0.6101 yesterday and 85.9 versus the yen from 86.68.

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

Last Updated: March 17, 2006 01:03 EST