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Australia, NZ dollars under pressure from revived Fed rate hike speculation

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The Australian and New Zealand dollars extended losses in thin liquidity on Monday after the US dollar was lifted by speculation the US Federal Reserve may raise interest rates this year after all.

[SYDNEY] The Australian and New Zealand dollars extended losses in thin liquidity on Monday after the US dollar was lifted by speculation the US Federal Reserve may raise interest rates this year after all.

The Australian dollar slipped to a two-week low of US$0.7592, from US$0.7628 late on Friday. Chart support was found at US$0.7550, a major retracement level of the July-August rally.

It also lost ground against the euro which rose near its highest in two months at A$1.4895.

The weakness came after Federal Reserve Vice Chairman Stanley Fischer gave a generally upbeat assessment of the US economy, giving bulls a reason to buy the US dollar.

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Investors were now awaiting comments by Fed Chair Janet Yellen later this week at the annual economic symposium in Jackson Hole, Wyoming.

Markets are implying around a 50-50 chance of a Fed hike by the end of the year but are not fully priced for move until mid- 2017.

The currency market has been recently buffeted by conflicting views on US monetary policy.

Still, the Aussie remained stubbornly high, having touched a three-month high of US$0.7760 earlier in August.

"The A$ has proven rather resilient thus far in 2016 and is currently not far from the highs for the year," said Su-Lin Ong, a senior economist at RBC Capital Markets.

She said part of this strength is due to further global easing and historically low rates lending support to higher yielding Australian dollar assets.

"The latest monthly data from Japan highlight ongoing demand from this key investor base who have been net buyers for 11 of the last 12 months," she said.

The New Zealand dollar edged down to US$0.7225, from as high as US$0.7291 on Friday.

"A turn in the domestic growth story or a more positive USD environment still seem to be the only real factors that could see the NZD turn meaningfully lower," said ANZ senior economist Philip Borkin, in a research note.

New Zealand government bonds eased, sending yields 1 basis point higher at the short end of the curve and 8.5 basis points higher at the longer end.

Australian government bond futures eased, with the three-year bond contract off 4 ticks to 98.600. The 10-year contract fell 4.5 ticks to 98.0850, while the 20-year contract was steady at 97.5475.

Australian two-year bonds now offer only 68 basis points more than their US counterpart, the smallest premium in a decade.

REUTERS

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