(Rewrites throughout with New Zealand dollar fall, updates figures)
By Swati Pandey and Charlotte Greenfield
SYDNEY/WELLINGTON, Oct 11 (Reuters) - The New Zealand dollar skidded to 2-1/2 month lows on Tuesday after the country's central bank bluntly warned that further policy easing would be needed to push inflation higher.
The New Zealand dollar NZD=D4 fell to $0.7062, its lowest since July 28 and its second straight day of weakness.
Assistant Governor of the Reserve Bank of New Zealand John McDermott said in a speech Tuesday afternoon that September quarter inflation, due Oct. 18, was expected to be low. annual inflation rate was 0.4 percent in the second quarter, well under the central bank's mandate to keep annual inflation at between 1 and 3 percent.
"The assistant governor's speech has sparked a new bout of selling on the NZD as traders continue to price in a rate cut at their November meeting," said Matt Simpson, Melbourne-based senior analyst at ThinkMarkets.
"Large speculators remain net-short Kiwi futures. They're clearly adding to those shorts right now, if anything."
The Australian dollar AUD=D4 hit a three-week low of $0.7543, falling in sympathy with the kiwi and as its U.S. counterpart strengthened on expectations of an interest rate hike by the Federal Reserve as early as December.
The greenback rose against most currencies after Democrat Hillary Clinton widened her lead in U.S. Presidential election polls over Republican Donald Trump, whose campaign is reeling from the impact of sexually aggressive comments he made about women in a video broadcast on Friday.
Investors tend to see a Clinton victory as a reaffirmation of the status quo, while a Trump victory would entail such policy uncertainty that the Fed might balk at tightening.
"The USD appears to be benefiting from the perception that a Clinton win will open the way for a December hike," said Rodrigo Catril, currency strategist at National Australia Bank.
According to the CME Fed watch, the market is pricing in a 70 percent chance of a rate hike in December compared with about 65 percent last week.
New Zealand government bonds 0#NZTSY= rallied, sending yields about 2 ticks lower at the long end of the curve.
Australian government bond futures were weak, with the three-year bond contract YTTc1 down 4 ticks at 98.34. The 10-year contract YTCc1 fell 6 ticks to 97.785. (Editing by Eric Meijer & Shri Navaratnam)