SYDNEY (Reuters) - The Australian dollar extended losses for a second straight session on Friday after a slump in retail sales reaffirmed the need for interest rates to remain at record lows, disappointing those bullish about the local currency.
The Australian dollar <AUD=D4> stumbled to $0.7743 - a level not seen since mid-July. It last traded at $0.7756.
The decline came after official data on Thursday showed retail sales dropped 0.6 percent in August, piling on to a 0.2 percent fall in July and making it the biggest back-to-back decline since October 2010.
The Aussie has tumbled almost 4 percent since hitting a more than two-year peak of $0.8125 last month as U.S. policymakers look to unwind stimulus, a contrast to Australia's policy settings where rates are expected to remain at record lows for at least another year.
The Aussie is set for its fourth straight weekly loss with the market trimming expectations for central bank rate hikes.
The futures market <0#YIB:> has narrowed the probability of a rate increase next year, pushing out the timing for a fully priced-in 25-basis-point rise to October 2018 versus the August timing seen just last week.
Across the Tasman Sea, the New Zealand dollar NZD=D4 edged down to a more than one-month low of $0.7146. It last traded at $0.7155.
The kiwi is heading for its second straight weekly loss, partly on a rising U.S. dollar and election-related uncertainties at home.
The near-term fate of the kiwi will be determined by the composition of the ruling coalition which is expected to be known next week.
The New Zealand First Party, which emerged as a kingmaker after the election, was expected to hold preliminary talks with both the ruling National Party and separately with the Labour Party this week.
"Next week, it will be all about the special votes and which party NZ First's Winston Peters chooses," said Prashant Newnaha, a Singapore-based rates strategist at TD Securities.
"We expect limited market reaction to a Nationals-NZ First coalition, but a sharper move lower is likely if NZ First joins forces with Labour but this coalition is a lower probability outcome in our view."
New Zealand government bonds <0#NZTSY=> rose, sending yields about 1 basis point lower across the curve.
Australian government bond futures slipped, with the three-year bond contract <YTTc1> down 3 ticks at 97.850. The 10-year contract <YTCc1> slipped 3.5 ticks to 97.1550.
(Editing by Sam Holmes)
