(Adds budget details)
By Wayne Cole
SYDNEY, May 8 (Reuters) - The Australian dollar hit an 11-month low on Tuesday as a rally in its U.S. counterpart completely overshadowed an upbeat budget from the country's government which pledged a return to surplus a year early.
The Aussie AUD=D4 took a turn lower in London trade as the euro and sterling both slid, leaving the U.S. currency as the main beneficiary. The Aussie was last down 0.8 percent at $0.7454, having breached a support around $0.7490.
The U.S. dollar has been on a roll as economic data there outpaced much of the rest of the advanced world. Figures on Australian retail sales out earlier on Tuesday were a case in point, badly missing forecasts. the local bond market found solace in an improving outlook for issuance. While Australia's budget was larded with pre-election sweeteners, it was also blessed with higher tax receipts allowing the government to predict a surplus of 0.1 percent of GDP by 2019/20. debt was estimated to peak at a relatively small 18.6 percent and issuance was expected to be pared back over coming years, underlining one attraction of Australia's triple-A debt to foreign investors.
It was a marked contrast to the United States were the deficit is exploding toward 5 percent of GDP due to massive tax cuts and increased spending.
Yields on U.S. 10-year paper US10YT=RR have risen above those in Australia AU10YT=RR for the first time since 2000. Currently the U.S. government has to pay 21 basis points more than Australia to borrow for a decade.
"The bond market would be very favourably disposed to the Budget achieving surplus earlier," said Westpac head of rates strategy, Damien McColough.
"It would provide credence to those looking for further Australian bond market outperformance relative to U.S. Treasuries," he added. "The contrast in the issuance profiles is already stark and would only become more so."
The better budget background should also help ensure Australia keeps its top credit rating from S&P, which had threatened to downgrade if the debt profile was not improved.
S&P has the country on a negative outlook, while Moody's and Fitch have a stable view. Indeed, Fitch affirmed its AAA-rating last week not even waiting for the budget detail.
Australian government bond futures edged up, with the three-year bond contract YTTc1 gaining 1 tick to 97.810. The 10-year contract YTCc1 rose 1.5 ticks to 97.2450.
The New Zealand dollar NZD=D4 fell to its lowest since December at $0.6975, having already taken a knock when a survey of inflation expectations showed a pullback.
The Reserve Bank of New Zealand reported inflation was expected to average 2.01 percent in two year's time, down from 2.11 percent in a February poll. would not be welcomed by policy makers given lowered expectations can drive down price plans and wage claims, in turn feeding through to lower actual inflation. (Editing by Shri Navaratnam and Gopakumar Warrier)