By Swati Pandey and Charlotte Greenfield
SYDNEY/WELLINGTON, April 6 (Reuters) - The Australian dollar made a 3-1/2-week trough on Thursday amid weaker-than-expected service sector activity in China, its No.1 trading partner, and jitters ahead of a meeting between the president of the United States and his Chinese counterpart.
The mood was also soured after the U.S. Federal Reserve indicated it might start unwinding its balance sheet later this year, causing a global flight to safety.
The Australian dollar AUD=D4 , a liquid proxy for yuan, slipped 0.4 percent to $0.7533, its lowest since March 13.
The Aussie has fallen in seven out of the last ten sessions and was on track for its worst weekly performance since late December.
Against the safe haven yen AUDJPY=R , the Aussie fell 0.5 percent to its lowest since Nov. 24. It hit a one-week trough on both the euro EURUD=R and the Swiss Franc AUDCHF=R .
The Aussie has been on a downtrend on the crosses since March 20 as traders unwound carry trade on concerns about U.S. President Donald Trump's ability to get his promised reforms passed. question in people's mind now is 'is the whole reflation trade overdone and what impact will that have on the Australian dollar?'," said Greg McKenna, chief market strategist at AxiTrader.
"And if there is a risk that markets have gotten ahead of themselves and valuations are stretched - as the Fed suggests - then the risk is the Australian dollar has further downside."
Regional geopolitical tensions have also escalated after North Korea test-fired a ballistic missile on Wednesday, ahead of the U.S.-China summit. Financial markets are nervous over the meeting because of Trump's constant criticism of China's economic policies. Caixin/Markit services purchasing managers' index (PMI) for March expanded at its weakest pace in six months, painting a less rosy picture of a sector that Beijing is counting on to maintain economic momentum. New Zealand dollar NZD=D4 stood at $0.6971, after falling for two straight sessions. It fell as far as $0.6940 on Wednesday, the lowest in three weeks.
"The NZD was under pressure again overnight, but it's difficult to see the NZD moving down too far given still-strong domestic data and improving export prices," Sharon Zollner, senior economist at ANZ, said in a research note.
An auction held early on Wednesday showed a better-than-expected rise in prices for dairy, New Zealand's largest goods export. Zealand government bonds 0#NZTSY= were little moved.
Australian government bond futures rose, with both the three-year bond contract YTTc1 and the 10-year contract YTCc1 up 3 ticks at 98.16 and 97.39, respectively. (Editing by Amrutha Gayathri)