By Swati Pandey and Ana Nicolaci da Costa
SYDNEY/WELLINGTON, July 27 (Reuters) - The Australian and New Zealand dollars shot up to two-year highs on Thursday as investors sold off the greenback following remarks on inflation by the U.S. Federal Reserve.
The Fed left interest rates unchanged on Wednesday and said it expected to start winding down its balance sheet "relatively soon". But it also noted that both overall inflation and a measure of underlying price gains had declined. perceived that as a softening of the Fed's stance, sending the U.S. dollar to a 13-month low against a basket of currencies .DXY . That helped pull the Aussie AUD=D4 to $0.8043 - the highest since May 2015.
The next big target for the Aussie is $0.8164 while support lies at $0.7850.
The New Zealand dollar NZD=D4 jumped to a high of $0.7542 from Wednesday's low of $0.7410. Analysts see key chart resistance at $0.7610.
Martin Whetton, rates strategist at ANZ, said in a note that to the extent the Fed's balance sheet reduction and low inflation delay rate hikes, "it does mean that policy rates in the U.S. will be low for longer".
"Against a backdrop of softening inflation, the market also appears to be reading it as a bit aggressive i.e. it will be a drag on U.S. growth."
The dollar has been on a downhill track in recent months as its perceived interest rate advantage is eroding with other central banks considering winding back their stimulus.
The Aussie fared well against others on Thursday too, holding near a two-year peak on the yen AUDJPY= led by carry trades where investors borrow in safe haven assets for high-yielding currencies.
The Australian dollar stood at a one-week high on the euro EURAUD=R despite strength in the latter in recent days on growing expectations the European Central Bank would reduce asset purchases from early next year. New Zealand dollar was at a six-month high on the yen NZDJPY=R and a near two-week top on the euro EURNZD= .
New Zealand government bonds 0#NZTSY= were broadly higher, with the 10-year government bond yield 3.5 basis points lower on the day.
Australian government bond futures gained, with the three-year bond contract YTTc1 up 5 ticks at 98.040. The 10-year contract YTCc1 rose 4 ticks to 97.3100. (Editing by Richard Borsuk)