By Swati Pandey and Rebecca Howard
SYDNEY/WELLINGTON, Sept 7 (Reuters) - The Australian dollar paused on Wednesday after a strong rally overnight as downbeat economic figures weighed on its U.S. counterpart.
The Australian dollar AUD=D4 held at $0.7673, near three-week highs after domestic data showed the economy expanded at its fastest annual pace in four years.
It rose 1.4 percent on Tuesday, advancing for a fifth consecutive day.
The Aussie is up more than 5 percent so far this year, thanks in large part to offshore interest in carry trades - where investors borrow at low rates in yen or euros to buy higher-yielding assets.
"The chase for yield is back in vogue," said Stephen Innes, senior currency trader at OANDA Australia and Asia Pacific.
Innes said the probability of a near-term rate hike by the U.S. Federal Reserve was diminishing after data on Tuesday showed the Institute for Supply Management's non-manufacturing purchasing managers' index fell to 51.4 last month. could see a further drop in the US dollar which would see AUD/USD re-test the August high of $0.7753," Innes added.
Locally, data on Wednesday showed the resource-rich economy expanded at 0.5 percent in the June quarter, clinching a remarkable run of 25 years without recession. New Zealand dollar NZD=D4 rose strongly, benefiting from a weaker U.S. dollar and stronger dairy prices.
International milk prices rose in an overnight Global Dairy Trade auction. The GDT Price Index, which covers a variety of products and contract periods, climbed 7.7 percent, with an average selling price of $2,920 per tonne. U.S. data saw the dollar dumped across the board and the Global Dairy Trade Auction added to NZD allure as the kiwi lead the global commodity currency charge," said OMF Financial Ltd's Private Client Manager Stuart Ive.
New Zealand government bonds 0#NZTSY= gained across most of the curve, with yields down 7.5 basis points at the long end.
Australian government bond futures rose, with the three-year bond contract YTTc1 up 2 ticks at 98.58. The 10-year contract YTCc1 inched 5.5 ticks higher.
Foreign holdings of Australian government bonds fell to their lowest in over five years last quarter, suggesting to analysts that either bond prices or the local dollar will have to weaken to revive appetite. (Editing by Kim Coghill)