By Wayne Cole and Charlotte Greenfield
SYDNEY/WELLINGTON, Dec 16 (Reuters) - The Australian and New Zealand dollars nursed hefty losses against their U.S. cousin on Friday as the prospect of more rate hikes from the Federal Reserve sent Treasury yields surging, though both fared much better against the euro and yen.
The Aussie was down at $0.7353 AUD=D4 and set for a weekly loss of 1.4 percent following the Fed's rate rise and signal of more to come.
Support was seen around the November trough at $0.7311, and a break would revisit ground last trod in May when it got as low as $0.7145.
The futures market is pricing in at least two more Fed hikes next year, but virtually no change in Australian rates over 2017 given low domestic inflation and moderate economic momentum.
The fall in the Aussie is itself a loosening in financial conditions that lessens the need for the Reserve Bank of Australia (RBA) to do any more on policy.
As a result the spread between Australian and U.S. two-year yields shrank to just 66 basis points and briefly touched the lowest since mid-2006.
Yet, policy in the European Union and Japan is expected to remain super-loose, with their central banks committed to keeping short-term yields down.
That has seen Australia's yield premium over Japanese debt widen to 212 basis points, and to 271 basis points on German paper. All of which kept the Aussie firm at 86.89 yen AUDJPY= after hitting its highest since early January at 87.52.
The euro came within a whisker of its lowest since mid-2015 before steadying at A$1.4164 EURAUD= .
The New Zealand dollar NZD=D4 was also hit hard by the rallying greenback to touch a three-week low of $0.7011, and was last at $0.7025.
"Momentum has flipped to negative, thanks to the U.S. dollar's surge, with the next major target at $0.6970," said Westpac markets strategist Imre Speizer, in a research note.
The currency had been trading at a more-than one-month high of $0.7230 before the Fed's announcement.
Though commodity currencies generally suffered due to the U.S. dollar's strength, the Kiwi still underperformed. The Aussie AUDNZD=D4 rose from A$1.0379 to A$1.0444 against its New Zealand neighbour.
New Zealand government bonds 0#NZTSY= eased, sending yields 7.5 basis points higher at the long end of the curve.
Australian government bond futures were making a poor end to a tough week. The three-year bond contract YTTc1 was off 4 ticks at 97.940, having shed 12 ticks for the week to touch its lowest since April.
The 10-year contract YTCc1 eased 1.25 ticks to 97.0800, having hit its lowest since December last year. (Editing by Simon Cameron-Moore)