July 20 (Bloomberg) -- The Australian dollar rose for a second day on optimism raw-material exports will increase after a report showed faster-than-expected economic growth in China.

Australian exports to China, the world's fastest growing major economy, have more than doubled in the past five years it demands more natural resources such as iron ore, coal, copper and aluminum. Demand from China, Australia's second-biggest export market, has helped the currency gain 3.4 percent in the past year.

``I'm relatively optimistic on the Australian dollar,'' said Sabrina Jacobs, a currency strategist at Dresdner Kleinwort Wasserstein in Singapore. ``China's economy isn't slowing down yet so this is supportive of the Australian dollar, clearly on commodity demand.''

The Australian dollar bought 75.17 U.S. cents at 1:16 p.m. in Sydney from 74.87 cents in late Asian trading yesterday. It has averaged 75.42 cents in the past 12 months and will trade between 74.75 and 75.75 cents over the next week, Jacobs said. Dresdner forecasts the currency to buy 79 cents by year-end.

Australia's dollar traded at its highest since October 1997 against the British pound, reaching 43.28 pence before paring gains to trade at 43.24 pence, and a seven-year high versus the yen at 85.10. It last traded at 85.08 yen from 84.42 yen yesterday.

China's gross domestic product rose 9.5 percent from a year earlier after climbing 9.4 percent in the first quarter, the National Bureau of Statistics said in Beijing. That compares with the median 9.2 percent gain forecast in a Bloomberg News survey of 13 economists.

Greenspan

Australia's copper exports to China rose 30 percent in 2004 to A$1.6 billion. The nation's nickel sales to China surged 88 percent, iron ore shipments gained 41 percent and coal exports rose 72 percent. Australia is the world's biggest exporter of iron ore, coal and alumina.

The Australian dollar's gains will be capped against the U.S. dollar because Federal Reserve Bank Chairman Alan Greenspan may today signal rate increases in the U.S. will continue, said Simon Stevenson, at Merrill Lynch Investment Management in Sydney.

Greenspan is scheduled to deliver his semi-annual testimony on the economy to Congress later today and tomorrow.

Australia's interest-rate advantage over the U.S. shrank over the past year as the Fed raised borrowing costs nine times since June last year to 3.25 percent. The bank will increase rates to 4 percent by year-end, based on estimates of 66 analysts surveyed by Bloomberg News in the 12 days to July 11.

Eighteen of 21 economists surveyed July 5 by Bloomberg News forecast the Reserve Bank of Australia will keep its key overnight lending rate between banks at 5.5 percent for the rest of the year. It has raised rates once since December 2003.

`Fundamentals Still Strong'

A decreasing interest-rate premium has narrowed the gap between Australian and U.S. two-year yields to a 3 1/2 year low. The difference between the two notes is 1.35 percentage points from 1.88 points six months ago and a year average of 2.04 points.

``The fundamentals are still strong for the Australian dollar but its yield gap is diminishing every time the Fed tightens and there's no indication they'll stop,'' said Stephenson, who helps manage about $6 billion of funds. ``I'm betting on the Australian dollar against the yen because it's harder and harder to see gains against the dollar.''

The yield on the 10-year Australian government bond fell 3 basis points, or 0.03 percentage point, to 5.23 percent.

The 6.25 percent bond maturing in April 2015 rose 0.208, or A$2.08 per A$1,000 face amount, to 107.727. Bond yields move inversely to price.

Metals Rally

The currency also gained after the price of industrial metals such as zinc and copper gained in London and New York yesterday. Higher metals prices typically buoy the currency because 20 percent of the country's economic growth is dependent on exports, of which almost 60 percent are raw materials.

``Metals have recovered from a poor day Friday so this is supportive for the Australian dollar,'' said Greg Gibbs, a Sydney- based currency strategist at RBC Capital Markets.

The Journal of Commerce Industrial Commodity Metals Price Index, which tracks 18 metals, increased 0.3 percent yesterday. Australia's dollar and the index had a correlation of 0.86 in the past three years. A reading of 1 signals they move lock step.

The currency also climbed against a backdrop of higher resource stocks in the U.S., confirming expectations of faster global growth, said Gibbs.

The U.S. Standard & Poor's Index had its eighth gain in nine days yesterday, lifted by Peabody Energy Corp., the largest U.S. coal producer, which reported profit more than doubled to a record on surging demand.

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

Last Updated: July 19, 2005 23:54 EDT