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Australian, New Zealand dollars remain hostage to Trump tariff threats

[SYDNEY] The Australian and New Zealand dollars were under pressure on Thursday as US President Donald Trump kept up his war of words with China over trade, even as talks between to two protagonists were set to resume.

Markets had calmed a little overnight but were jolted anew in Asia when Mr Trump told a rally of supporters that China had "broke the deal" and would be paying for it.

Mr Trump has threatened to impose additional tariffs on Chinese goods beginning on Friday, while Beijing announced it would retaliate if tariffs rise.

The Aussie dollar slipped 0.1 per cent to US$0.6971 on Mr Trump's latest outburst, leaving it just a whisker above the recent four-month trough of US$0.6960.

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China is Australia's single largest export market so anything that might dim the outlook for Chinese trade is taken as a negative for the Aussie.

On the other hand, Australia's exports to China have shown little sign of suffering in past months. In March, exports were up 21 per cent on the same time last year helped by high prices for iron ore.

Some analysts also assumed Beijing would be able to deal with the drag on trade.

"If the US government applies a blanket 25 per cent tariff rate on all of Chinese exports to the US, we estimate the direct economic hit to Chinese GDP would be around 0.4 per cent," said Joseph Capurso, a senior currency strategist at CBA.

"A hit of this magnitude can be easily offset with fiscal and/or monetary policy easing," he added. "We do not expect a material impact on the Chinese, US or Australian economies."

The New Zealand dollar eased a touch to US$0.6573, having already hit a six-month low of US$0.6525 on Wednesday after the country's central bank cut interest rates to record lows.

The Reserve Bank of New Zealand (RBNZ) trimmed its cash rate a quarter point to 1.5 per cent citing the need to bolster inflation and employment.

Yet the bank also said the outlook for policy was now more balanced and projected no more moves this year.

"Its forward cash rate profile suggests modest risk of one further rate cut," said Andrew Ticehurst, an economist at Nomura. "We see the cash rate as most likely staying at its current level – certainly over the next few months."

"We maintain a bearish NZD view relative to much of the G-10, but do not expect to see a major NZD decline."

In the bond market, prices were supported by the general mood of risk aversion. Australian three-year bond futures firmed 1 tick to 98.740, while the 10-year contract rose 1.5 ticks to 98.2700.

Yields on New Zealand's two-year government bond stood at 1.425 per cent, having touched an all-time low of 1.338 per cent on Wednesday.