By Swati Pandey
SYDNEY, Sept 26 (Reuters) - The New Zealand dollar fell again on Tuesday as political uncertainty weighed on investor sentiment, while its Australian counterpart struggled below a key chart level as markets were rattled by fears of war on the Korean peninsula.
The New Zealand dollar NZD=D4 hit a 1-1/2-week low of $0.7237, clocking its second straight day of losses after no single party won enough seats to form a government at Saturday's general election. response, the kiwi fell 1 percent on Monday for its biggest one-day percentage loss since May 11. It piled on another 0.3 percent on Tuesday and was already poised for its worst weekly performance since late April.
The kiwi is the world's 11th most-traded currency, sought after by investors for its attractive yields and the nation's strong credit ratings thanks to its stable political and economic institutions.
But the market is feeling the jitters over the composition and potential economic policies of the new government with far-right New Zealand First (NZF) emerging as a kingmaker.
The presence of NZF was a sticking point for markets since some of its policies, including limiting immigration and imposing tighter restrictions on foreign investments, were unpopular with investors.
The market still believes the ruling National party with 58 seats would form a government with the NZF, with the Labour Party remaining in opposition.
Such an outcome "would for the most part generate continuity in the economy's structural themes, with National's legislated fiscal stimulus for next year still in train," said Ben Jarman, economist at JP Morgan.
"That stimulus is important in an environment of otherwise weakening growth impulses."
Across the Tasman Sea, the Australian dollar AUD=D4 held at $0.7941, after breaking below major support of 80 U.S. cents last week when it touched a near one-month trough.
Against the Japanese yen AUDJPY=R , the Aussie steadied near 1-1/2-week lows after three consecutive sessions of losses.
Bonds rallied as tensions between the United States and North Korea took another sour turn.
North Korea amped the level of anxiety in global markets by saying U.S. President Donald Trump had declared war on the country and that Pyongyang reserved the right to take countermeasures. Zealand government bonds 0#NZTSY= rose, sending yields about 5 basis points lower at the long end of the curve.
Australian government bond futures ticked higher, with the three-year bond contract YTTc1 up 2 ticks at 97.830. The 10-year contract YTCc1 climbed 2.5 ticks to 97.195.
Investors are focused on a speech by U.S. Federal Reserve Chair Janet Yellen later in the day for cues on monetary policy settings in the world's largest economy.
(Editing by Jacqueline Wong)