By Cecile Lefort and Rebecca Howard
SYDNEY/WELLINGTON, Nov 23 (Reuters) - The Australian dollar held near four-month highs against a soggy euro on Monday as expectations of further easing by the European Central Bank (ECB) underpinned demand for carry trades.
The euro dropped to A$1.4679, its lowest since July, after shedding 1.5 percent on Friday.
It was last at A$1.4758 and dealers said a sustained break under A$1.4695 could see a retracement all the way to A$1.4000 with little chart support seen until then.
Much of the weakness is due to the diverging interest rate outlook between the ECB and the U.S. Federal Reserve which saw yields on German debt dive further into negative territory.
"The anticipated quantitative easing expansion in Europe and the idea that the US Fed will enter a soft lift off hiking cycle has forced investors hands and are now looking for yield," said Stephen Innes, senior trader at FX/CFD firm OANDA Australia and Asia Pacific.
As a result, investors piled in carry trade where the market borrows at low rates in euro to buy higher-yielding assets, such as the kiwi and Aussie.
The euro held near five-month lows at NZ$1.6276 and a break of NZ$1.6152 would be the weakest since June.
Euro weakness has helped the Antipodean currencies against their U.S. counterpart, though both remain vulnerable to weakening commodity prices. Iron ore, Australia's top export earner, is near its lowest since 2008.
The Aussie stood at $0.7185, having fallen from an early peak of $0.7249 in part due to a drop in copper prices. Support was found at $0.7185 and resistance near $0.7250, a level tested four times in as many weeks.
Trading activity during Asian hours was thinned due to a public holiday in Japan.
The New Zealand dollar NZD=D4 was trading lower at $0.6520 as expectations of a U.S. rate hike next month kept the U.S. dollar firm.
News that New Zealand's net migration inflows remain extremely high and are showing no sign of moderating had little impact as inflationary pressure remains very low.
ASB Bank Monday said it now expects the RBNZ to cut the official cash rate three more times: at the upcoming December policy meeting, then again in June and August 2016, bringing the OCR to a low of 2 percent.
New Zealand government bonds eased a tad, sending yields 2 basis points higher across the curve.
Australian government bond futures fell, with the three-year bond contract YTTc1 down 3 ticks at 97.830, pulling close to five-month lows. The 10-year contract YTCc1 shed 3.5 ticks to 97.0300, while the 20-year contract YXXc1 eased 4 ticks to 96.5000. (Editing by Kim Coghill)