By Wayne Cole and Charlotte Greenfield
SYDNEY/WELLINGTON, Sept 25 (Reuters) - The Australian and New Zealand dollars edged lower on Tuesday as investors looked past the Sino-U.S. trade dispute to ponder what surprises the Federal Reserve might spring at its coming policy meeting.
The Australian dollar AUD=D3 dipped 0.2 percent to $0.7240, having already backed away from resistance around $0.7300 on Monday.
A rate hike from the U.S. Fed on Wednesday is considered a done deal, with another likely for December as well, leaving the focus on what it outlines for next year and beyond.
"The Fed path points to reaching neutral - 2.5 to 3 percent - by mid-2019," said Gavin Friend, senior markets strategist at NAB. "The key debate in mid-2019 will be whether the Fed needs to go into restrictive territory."
He noted U.S. Treasuries had already priced in a more hawkish outcome with short-term yields at decade highs, while the 10-year yield US10YT=RR touched a four-month top at 3.098 percent.
That suggested there was a chance yields would retreat if the Fed sounded less-than-hawkish, offering an excuse to sell U.S. dollars.
"The dollar has weakened despite higher yields and strong growth metrics, which may suggest a shift in foreign investor appetite," added Friend.
Germany's 10-year Bund yield had also climbed to its highest since mid-June after European Central Bank President Mario Draghi highlighted a "relatively vigorous" pick-up in inflation and noted building wage pressures. euro responded by rising 0.5 percent on the Aussie overnight and was last at A$1.6189 EURAUD= .
All of which combined to lift Australian 10-year yields AU10YT=RR to a seven-week peak at 2.75 percent, and threatened a multiple top from early August at 2.76 percent.
In the futures market, the three-year bond contract YTTc1 fell 3 ticks to 97.820, while the 10-year contract YTCc1 shed 5 ticks to 97.2300.
Across in New Zealand, the kiwi NZD=D4 eased to $0.6637 after running into offers around $0.6690 on Monday.
"We had thought the NZD would see a little more positive momentum here as trade faded into the background, at least for now, but the failure to break above 67 cents suggests the path higher is going to meet some decent resistance," Liz Kendall, senior economist at ANZ Bank, said in a research note.
The next two days could be a rocky ride with a survey measuring business confidence, which has sunk to decade-lows in recent months, due out on Wednesday and a central bank interest rate due on Thursday.
The Reserve Bank of New Zealand is expected to hold rates steady and reiterate its dovish stance on policy, remaining wary of stubbornly low inflation and the risks of an economic slowdown. (Editing by Eric Meijer)