By Cecile Lefort and Rebecca Howard
SYDNEY/WELLINGTON, Dec 15 (Reuters) - The New Zealand dollar climbed to seven-week highs on Tuesday as investors pared short positions ahead of a dairy auction later in the session, while the Australian dollar bounced off three-week lows.
The New Zealand dollar NZD=D4 rose as far as $0.6795, its highest since late October, from $0.6781 in early trade. It is up more than 2 cents since the central bank last week said it might be done cutting interest rates.
A sustained break above key resistance around $0.6786 would open the way to 69 cents, a level last touched in June.
Underpinning sentiment are expectations of a 7 percent rise in milk prices at an overnight GlobalDairyTrade auction. Dairy is New Zealand's top export earner.
Also helping was a government budget that was largely balanced.
Wellington-based OM Financial adviser Stuart Ive said markets may have reacted positively when Finance Minister Bill English said that he was satisfied the Reserve Bank of New Zealand's monetary policy was in line with its mandate to keep inflation within a 1 percent to 3 percent range.
"It was basically a thumbs up from the government," said Ive.
The main focus for markets is now on the U.S. Federal Reserve, which is widely expected to raise interest rates on Wednesday for the first time in nearly a decade.
New Zealand government bonds 0#NZTSY= gained sending yields lower across the curve, in particular at the long end.
The Australian dollar AUD=D4 regained some ground at $0.7257, having leapt nearly 0.8 percent on Monday. Resistance was found at $0.7270 with support at a key Fibonacci retracement level of $0.7158.
The Aussie drew some support from a slight bounce in prices of iron ore following nine sessions of losses. The mineral is Australia's top export earner.
Also helping was a relatively upbeat Reserve Bank of Australia, which said recent positive economic trends suggested a steady rate outlook in the near term. urn:newsml:reuters.com:*:nRUAENEB0F
In minutes of its December policy review, the RBA said "very low interest rates" and a weaker exchange rate were already providing much support to the economy.
The federal government's budget mid-year update showed the deficit is expected to rise to A$37.4 billion ($27.13 billion) in the year to June as falling prices for key resource exports open a gaping hole in tax revenues.
Net debt is forecast to peak at 18.5 percent of gross domestic product by June 2018, which remains well below the ratio of other developed countries like Japan, the United States or France.
Australian government bond futures were softer with the three-year bond contract YTTc1 off 2 ticks at 97.845. The 10-year contract YTCc1 eased 2 ticks to 97.0925, while the 20-year contract YXXc1 was steady at 96.6100. (Editing by Kim Coghill)