By Cecile Lefort and Rebecca Howard
SYDNEY/WELLINGTON, May 25 (Reuters) - The Australian dollar hovered near three-month lows on Wednesday on falling iron ore prices and speculation that the Reserve Bank of Australia (RBA) will ease policy further.
The Australian dollar AUD=D4 held at $0.7181, steadying from $0.7145 touched on Tuesday, which was its lowest since early March.
Charts suggest the next big support levels are $0.7109, then $0.7065.
In his first public remarks since cutting the policy rate rot a record low on May 3, RBA Governor Glenn Stevens commented on Tuesday on uncertainties over the economic transition in China, Australia biggest export market. remarks gave currency traders an excuse to sell the Aussie on speculation of more RBA easing even though bond markets remained placid.
"Some blamed RBA governor Stevens' interview," said Sean Callow, a senior strategist at Westpac.
Interbank futures 0#YIB: price a 8 percent chance of a cut at the June 7 policy review, unchanged from Tuesday. They remain fully priced for a move by December.
Another sharp drop in prices for iron ore .IO62-CNI=SI also hit sentiment toward the commodity-linked Australian currency. The price of Australia's top export earner has fallen 23 percent this month.
The Aussie lost 4 cents so far this month, putting it on course for the largest monthly drop in 18 months as speculation mounts for a U.S. interest rate rise as early as June.
The diverging rate outlook between Australia and the United States reduced the premium between Australian AU2YT=RR and U.S. US2YT=RR two-year cash bond yields to 73 basis points, its lowest in 15 years. It was 130 basis points mid-April.
The New Zealand dollar NZD=D4 edged up to $0.6753, after data showing a higher than expected NZ$292 million trade surplus in April. was better than expected and the kiwi is holding up reasonably well," said Tim Kelleher, ASB Head of FX Institutional Sales New Zealand. The Kiwi, however, was still near two-month lows of $0.6706 touched on Tuesday.
Next major support was found at $0.6670.
The focus is on dairy giant Fonterra's opening forecast. Investors will be watching how much the cooperative expects to pay its 10,500 farmer shareholders in the season that kicks off June 1. The government is also due to present its budget Thursday.
New Zealand government bonds 0#NZTSY= eased, pushing yields 0.5 bps points higher at the short end and 1.5 bps higher at the long end.
Australian government bond futures dipped in a bearish steepening of the curve, with the three-year bond contract YTTc1 off 2 ticks at 98.380. The 10-year contract YTCc1 eased 4 ticks to 97.6850, while the 20-year contract YXXc1 shed 3.5 ticks to 97.0550. (Editing by Simon Cameron-Moore)