By Cecile Lefort and Charlotte Greenfield
SYDNEY/WELLINGTON, May 4 (Reuters) - The Australian dollar dropped to a seven-week low on Wednesday after the central bank's first rate cut in a year and sliding commodity prices further trimmed long positions in the currency.
The New Zealand dollar also skidded on broad U.S. dollar strength and falling dairy prices.
The Australian currency AUD=D4 stood at $0.7489, having sunk as deep as $0.7467, its lowest since mid-March and down two cents in 24 hours.
Key support was found at $0.7455, the 38.2 percent retracement of the January-April rise and a break would target $0.7335.
The market has recently held very long positions on the Aussie dollar as a yield play and was caught off-guard by the Reserve Bank of Australia's rate cut to a record low of 1.75 percent.
"The RBA's concerns about entrenched low inflation and deflation risks mean that another rate cut is likely," said Michael Workman, a senior economist at Commonwealth Bank of Australia, seeing an easing to 1.50 percent in August.
Debt markets 0#YIB: imply around a 50-50 chance of a move by August.
Also undermining the Aussie were sliding commodity prices with iron ore, Australia's top export earner, slipping 4 percent on Tuesday.
The Aussie dollar hovered near multi-week lows across the board. Against its New Zealand it managed to bounce 1.5-cent to NZ$1.0873 AUDNZD=R , from a trough of NZ$1.0746.
The New Zealand dollar NZD=D4 was trading at $0.6925, up from Wednesday's opening price of $0.6915, but far from Tuesday's high of $0.7054.
It had been sucked lower overnight by the RBA's easing and a fall in global dairy prices, though strong domestic employment data provided some support. NL3N1803N5
Data showed a solid rise in employment in the first quarter and while the jobless rate edged up, this was due to a sharp expansion in the labour force. unemployment lift in the quarter was entirely the result of strong participation, which is an encouraging sign," said ANZ analysts in a research note.
New Zealand government bonds 0#NZTSY= gained, sending yields 6.5 basis points lower at the long end of the curve.
Australian government bond futures extended their rally, with the three-year bond contract YTTc1 2 ticks higher at 98.280 and near a two-month peak.
The 10-year contract YTCc1 rose 4.5 ticks to 97.5800, while the 20-year contract YXXc1 added 4 ticks to 96.9650.
The premium between two-year Australian AU2YT=RR and U.S. US2YT=RR government debt dropped below 1 percent for the first time since early March. (Editing by Sam Holmes)