By Cecile Lefort and Rebecca Howard
SYDNEY/WELLINGTON, Dec 23 (Reuters) - The Australian and New Zealand dollars pulled ahead on Wednesday as investors sought their relatively higher yields, with market liquidity further drained by a Tokyo holiday in already thin trading.
The New Zealand dollar NZD=D4 was a clear outperformer at $0.6809, hovering close to a two-month peak of $0.6836 touched on Tuesday.
It has been on the rise ever since the Reserve Bank of New Zealand indicated it was unlikely to cut rates further from 2.5 percent, easily the highest among developed nations.
While the Federal Reserve has embarked on a policy tightening path it is expected to be a very gradual affair.
"Post the Fed's meeting, traders may be squaring up long USD positions, whilst others are reluctant to put on new positions into year-end," said BNZ Senior Market Strategist Kymberly Martin.
Broadly stable commodity prices and improving risk appetite have also helped the Kiwi. It got some support from a slightly narrower-than-expected November trade deficit, although the annual shortfall was the largest in six-and-a-half years. urn:newsml:reuters.com:*:nW9N13Z00V
The kiwi made headway against a battered pound which skidded 1 percent on Tuesday to touch a six-month trough of NZ$2.1700 GBPNZD=R .
The Australian dollar AUD=D4 crawled higher to $0.7237, from a low of $0.7182 on Tuesday. It has gained 0.7 percent this week, due in part to firmer prices for iron ore. The mineral .IO62-CNI=SI has risen for six consecutive sessions since touching multi-year lows.
Resistance was found near $0.7242 with a stronger barrier at $0.7280.
Against its Canadian counterpart, the Aussie held its own at $1.0008. It broke key resistance on Tuesday when it powered up to C$1.0108 AUDCAD=R , the highest level in over a year.
Tumbling oil prices have taken a heavy toll on Canada's Loonie, which is down around 6 percent this year.
Australian government bond futures retreated from multi-week peaks, with the three-year bond contract YTTc1 down 1 tick at 97.940. The 10-year contract YTCc1 lost 3.5 ticks to 97.1650, while the 20-year contract YXXc1 shed 3 ticks to 96.6800.
New Zealand government bonds 0#NZTSY= eased, sending yields 2.5 basis points higher across the curve. (Editing by Shri Navaratnam)