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Australia, NZ dollars bounce as market wagers on Fed contenders

[SYDNEY] The Australian and New Zealand dollars bounced on Wednesday as their US counterpart gave back some of its recent gains amid speculation about who might be the next chair of the Federal Reserve.

The Aussie popped up 0.4 per cent to US$0.7864, having touched a three-month trough at US$0.7785 overnight. The kiwi likewise rallied 0.5 per cent to US$0.7193 and away from a one-month low at US$0.7147.

Dealers said speculators had been shorting both currencies in recent days and were wing-footed when the US dollar took a sudden turn in Asian trade.

The pullback was linked to reports that US Treasury Secretary Steven Mnuchin favoured Fed governor Jerome Powell to replace Janet Yellen as Fed chair.

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That was a change from recent talk that former Fed governor and well-known hawk Kevin Warsh was the front-runner for the world's most powerful central bank position.

"Powell is perceived as being a relatively dovish choice compared to Warsh," said analysts at Citi.

"As a result, we've seen US yields head lower again."

Yields on 10-year Treasuries had eased to 2.32 per cent, after reaching a three-month top of 2.37 per cent early in the week when investors were busy amassing huge short positions in expectations of a Warsh win.

That proved a timely development for kiwi bulls as the currency had been under pressure after a disappointing auction of dairy, New Zealand's biggest goods export.

Global dairy prices suffered their biggest loss in more than six months and confounded futures market expectations of a rally. Meanwhile, once red-hot house prices grew at the slowest rate in two years in September, an index from valuer QV showed, adding to the case for keeping interest rates low.

"Weaker milk and house prices reinforce that NZ's previously pristine growth position is not as pretty," said Con Williams, economist at ANZ Bank.

New Zealand government bonds gained, sending yields 0.5 basis points lower at the long end of the curve.

Australian government bond futures ticked higher with Treasuries. The three-year bond contract added one tick to 97.830, while the 10-year contract rose two ticks to 97.1500.

REUTERS