Jan. 27 (Bloomberg) -- The Australian dollar declined for a second day on concern sliding prices for commodities that the country sells overseas such as gold, copper and nickel may hurt exporters' earnings and damp economic growth.

Demand for the currency fell after the price of gold dropped for a fourth day in New York. Rising prices of raw materials such as gold, which gained 20 percent last year, handed the Australian dollar a gain of about 34 percent in 2003, the biggest rise versus the U.S. dollar among 60 currencies tracked by Bloomberg data.

The currency ``has been losing some of the attractiveness that had been coming from commodities' rally,'' said Andrew Delano, a foreign-exchange analyst for IDEAglobal, a New York- based research company.

The Australian dollar fell to 77.01 U.S. cents as of 6:31 p.m. in Sydney, down 0.4 percent from late Asian trading yesterday.

The Reuters-Commodity Research Bureau Futures Price Index of 17 commodities yesterday fell 0.4 percent.

Australia's currency tends to react to such price movements because its economy relies on the export of raw materials. Exports make up about a fifth of the economy, with commodities accounting for 15 percent of earnings from overseas.

Gold futures fell in Asia after the U.S. dollar strengthened, making the dollar-priced metal more expensive for buyers using other currencies. Gold for February delivery fell as much as $3.60, or 0.9 percent, to $403.10 an ounce on the Comex division of the New York Mercantile Exchange.

Inflation Report

The Australian dollar also dropped on speculation a report tomorrow may show inflation slowed, reducing prospects the central bank will further raise its benchmark interest rate and discouraging investors looking to buy higher-yielding assets.

The Reserve Bank raised its benchmark interest rate a quarter percentage point in November and increased the rate again in December to 5.25 percent to slow borrowing and consumer spending. It may raise rates again at a Feb. 3 meeting, according to 14 of 21 economists surveyed earlier this month.

The inflation data ``could impact on the interest rate outlook,'' said Greg Gibbs, senior currency strategist at Royal Bank of Canada in Sydney. The local dollar has risen more than ``a lot of currencies on the expectation the central bank could hike rates next week, so if it's a very weak number it could undermine the Australian dollar.''

Inflation as measured by consumer prices probably slowed to 0.5 percent in the three months ended Dec. 31, according to the median of 17 forecasts in a Bloomberg News survey, compared with 0.6 pct the previous quarter. The inflation report, scheduled for tomorrow, may show prices rose 2.4 percent from a year ago.

Business Conditions

The currency last week rose for the fourth week in five as the country's higher interest rates relative to other nations including the U.S. drew overseas funds to its assets.

Some investors may buy the currency on expectations signs of improving profits and labor conditions will still prompt the central bank to raise interest rates, attracting investors.

National Australia Bank Ltd's business conditions index, which is a measure of sales, earnings and employment, rose 5 points to 23 last quarter, a nine-year high, the bank said in a survey released today in Melbourne.

``People will be looking towards the'' central bank ``meeting and asking whether they will hike interest rates and the odds are they probably will,'' said Craig Ferguson, a currency strategist in Melbourne at Australia & New Zealand Banking Group Ltd. ``Under that scenario the Australian dollar is still a good buy because the interest rate differential to the U.S. is getting wider.''

Australia's benchmark borrowing rate is the highest among countries that have the top credit rating from both Standard & Poor's and Moody's Investors Service.

Last Updated: January 27, 2004 02:41 EST