By Wayne Cole
SYDNEY, Sept 19 (Reuters) - The Australian dollar rallied for a third straight session on Wednesday as investors wagered China would take steps to support domestic growth in its trade dispute with the United States, so underpinning demand for commodities.
Risk appetite was also helped by news that North and South Korea had made some progress on denuclearisation of the peninsula. Australian bond yields hit three-month peaks as a result and the Aussie firmed 0.3 percent to $0.7240 AUD=D4 . A break of chart resistance around $0.7235 also tripped a round of stop-loss buying.
The trade-exposed currency had been shorted heavily in recent weeks as a hedge against an escalation in the Sino-U.S. dispute and investors were taking profits on those positions.
The reversal was particularly notable against the safe-haven yen where the Aussie jumped 1 percent overnight and was last trading up at 81.31 AUDJPY= . A couple of weeks ago it had been as low as 78.64 yen.
The Aussie got a lift after China's Premier Li Keqiang talked of supporting the economy, fuelling market speculation of more stimulus. cautioned that the latest broadsides on tariffs were a risk to China's growth, but argued the implications for Australia were not so grave.
"We now assume the U.S. government will eventually apply a 25 percent tariff on all of its $500 billion-plus of imports from China," warned Joseph Capurso, a senior currency strategist at CBA.
He estimated that could take around 0.4 percentage points off China's economic growth, spread over several quarters.
"We still estimate a negligible impact on Australia's economy because very little of what Australia sells to China is re-exported by China to the U.S.," he added.
Australia's exports to China are dominated by iron ore, coal and liquefied natural gas, along with services such as tourism and education.
Sovereign debt markets were harder hit, in part on talk Beijing might cut back its purchases of U.S. debt just as Washington is borrowing ever more to fund budget deficits.
A sharp rise in Treasury yields spilled over into the Australian market lifting two-year yields AU2YT=RR to 2.12 percent. That was the highest since early June and up from 2.01 percent at the start of the week.
Yields on 10-year paper AU10YT=RR climbed to 2.71 percent, a six-week high. New Zealand government bond yields 0#NZTSY= rose 3 to 4 basis points across the curve.
The New Zealand dollar NZD=D4 also edged up 0.18 percent to $0.6594, but was hampered by some disappointing local data.
The country's current account deficit widened by more than expected in the second quarter, suggesting some downside risk to the gross domestic product report due on Thursday. separate survey from Westpac McDermott Miller showed consumer confidence dropped to a six-year low of 103.5 in the third quarter. (Editing by Kim Coghill)