(Add comment post RBA monetary meeting)
By Cecile Lefort and Gyles Beckford
SYDNEY/WELLINGTON, Aug 4 (Reuters) - The Australian dollar rallied on Tuesday after the Reserve Bank of Australia (RBA) surprised some by tempering its call for a lower currency, triggering a swift short squeeze.
The Australian dollar gained nearly 1 percent to a peak of $0.7356, pulling away from a six-year trough of $0.7234 set last week. It was last at $0.7349 with resistance around $0.7367, the 76.4 percent retracement of the June-July move.
The RBA said the Aussie was adjusting to significant declines in key commodity prices, but dropped a reference to further falls as being both likely and necessary.
"The fact that they have toned (it) down suggests that the easing bias, which was already pretty modest, is very mild," said Su-Lin Ong, a senior economist at RBC Capital Markets.
"It suggests that maybe (the Aussie) is closer to appropriate levels."
The central bank also kept rates at 2 percent after cutting them to all-time lows in May, saying policy needed to be stimulative given sub-par economic growth.
Bearish investors, who had already been shaken by solid domestic retail sales figures earlier in the day, were forced out of Aussie short positions.
The pound, yen and kiwi dollar were all nursing hefty losses with the euro off 0.9 percent to around A$1.4900. It has dropped three cents in the past week.
Market pricing now implies around a 60 percent chance of a move by December, compared to 72 percent earlier in the day.
Australian government bond futures were mixed, with the three-year bond contract YTTc1 down 1 tick at 98.100. The 10-year contract YTCc1 added 4 ticks to 97.2500, leading to a flattening of the curve.
The New Zealand dollar NZD=D4 trimmed losses to $0.6568, not far from $0.6535 touched last week and remained vulnerable.
ANZ Bank's commodity price index slumped 11.2 percent in July, a record monthly fall that took it to the lowest level in nearly six years.
In New Zealand dollar =NZD terms, the index was down 6.7 percent even though the currency fell 4 percent from June.
"The sizable fall in NZ dollar prices tells us that the NZ dollar is not moving fast enough in response to shifts across commodities," said ANZ agri-economist Con Williams.
The kiwi's next test is a global dairy auction due on Wednesday, with futures pointing to around a 10 percent dive in key prices. Near term kiwi support is seen around $0.6540 and resistance at $0.6615.
New Zealand government bond yields were as much as 5 basis points lower at the long end of the curve. (Editing by Richard Borsuk & Shri Navaratnam)