SYDNEY (Reuters) - The Australian dollar inched closer to a 3-1/2 month peak on Thursday, and its New Zealand cousin was buoyant too, after a cautious policy outlook from Federal Reserve Chair Janet Yellen dented the U.S. dollar.
The Australian dollar <AUD=D4> stood at $0.7685, not far from a June 30 high of $0.7712. The Aussie was now on track for a third straight sessions of gains but still faces stiff resistance atop 77 cents.
The New Zealand dollar <NZD=D4> edged higher for a second day to $0.7264. The Kiwi had hit a five-month high of $0.7347 on June 30 but this rally has since stalled.
"Yellen stated that U.S. rates don't have much further to rise to get back to a neutral rate. The Fed's rate hiking cycle may be closer to the end than to the beginning," said William O'Loughlin, investment analyst at Rivkin Securities.
Yellen on Wednesday reiterated the Fed's intention to raise rates and begin winding down its massive bond portfolio, while adding that low inflation may leave the central bank with diminished leeway.
"Yellen still expects the balance sheet normalisation process to begin this year but this is anticipated to be a very slow process," O'Loughlin added.
Yellen's comments sparked a significant decline in U.S. Treasury yields, paving the way for more carry trades where investors borrow in low-yielding currencies to invest in higher-yielding assets such as the Aussie.
The antipodean currencies were also supported by a rate hike in Canada - the first since 2010 - which led some in the forex market to speculate that Australia and New Zealand would follow suit given the similarities in their resource-led economies.
Most analysts, however, expect central banks in Australia and New Zealand to keep interest rates at record lows of 1.50 percent and 1.75 percent respectively in the coming months.
"NZD and AUD were dragged higher by the CAD, perhaps a sign that the market believes the RBNZ and RBA are going to shortly follow their commodity-exporting cousin. We doubt that," ANZ economist, Jo Masters said.
New Zealand government bonds <0#NZTSY=> rose in line with U.S. Treasuries, sending yields down 3 basis points across the curve.
Australian government bond futures gained, with both the three-year <YTTc1> and the 10-year bond contracts <YTCc1> up 3 ticks at 98.010 and 97.3100 respectively.
(Editing by Sam Holmes)
