By Cecile Lefort and Naomi Tajitsu
WELLINGTON/SYDNEY, March 2 (Reuters) - The Australian dollar muscled in on the yen on Friday to scale a fresh 10-month peak and was firm on its U.S. counterpart as strong equities and commodities underpinned sentiment.
The Aussie powered up to 87.97 yen , its highest since May, having gained nearly 12 percent so far this year. Resistance is found at 88.10, the May 15 peak, ahead of 88.95. It was last at 87.89.
Some traders said the Australian dollar's relentless rise is set to continue as last month's easing by the Bank of Japan makes the yen a currency of choice to fund carry trades.
Others, however, attribute the spike to the unwinding of speculative yen long positions rather than to conventional carry trades.
"Japanese retailers are not buying foreign exchange, they are selling...Most of the Aussie uridashi seen in the past weeks have been offering deep discounts, that's not a sign of ultra confidence," said Robert Rennie, chief strategist at Westpac.
Uridashi are bonds denominated in foreign currencies and sold to Japanese individual investors.
"I have a hard time seeing the AUD/JPY above 90 yen," he said.
The kiwi also rose, hovering around seven-month highs at 68.19 yen , not far from Monday's peak of 68.27.
The Antipodean currencies held their ground against an otherwise firm U.S. dollar, aided by buoyant Asian bourses and high commodity prices. Copper was hovering near this year's highs at $8,8630 a tonne.
China's solid PMI released on Thursday also underpinned sentiment. The Aussie and kiwi dollars are very sensitive to news from China, one of their key export markets.
The Aussie last stood at $1.0792, off a low of $1.0716 hit Thursday. It has gained nearly 6 percent this year and touched a seven-month peak of $1.0857 earlier in the week.
Technicals suggest the uptrend faces resistance around $1.0850. Dealers cited bids around $1.0700 which would form its first line of support.
NEW ZEALAND DOLLAR
The New Zealand dollar slipped 0.2 percent on the day to $0.8375, keeping its distance from a six-month high of $0.8471 hit earlier this week.
Traders said the currency was on the backfoot after it failed to hold above key resistance around $0.8430, and was poised to end flat on the week. Offers around $0.8400 were expected to cap any upside in the currency.
However, its downside was limited by technical support around $0.8345-$0.8455, which contained its 14- and 21-day moving averages. Traders also cited bids at $0.8300.
The kiwi underperformed the Australian dollar, which rose 0.2 percent to NZ$1.2890 . More Aussie gains may be in store, particularly if it ends the day above its 200-day moving average around NZ$1.2875.
The euro came off its lows against the Antipodean currencies but remained under pressure.
It was last at A$1.2323 , after slipping to a near two-week low of A$1.2308 overnight. Likewise, the single currency traded at NZ$1.5881 against the kiwi, from NZ$1.5837, its lowest since Feb 22.
Traders suspected the European Central Bank's determination to flood the euro zone with easy money will increasingly turn the euro into a funding currency for carry trades.
The euro has dived 12 percent since its November peak against the Aussie, with charts pointing to further losses.
Investors await New Zealand manufacturing data due next week, along with a policy statement by the Reserve Bank of New Zealand. Few in the market expect any surprises from the central bank, which is widely expected to hold interest rates at 2.5 percent on Thursday.
New Zealand government bonds slip, nudging yield up as much as 3 basis point at the longer end of the curve.
Australian bond futures slipped 0.04 points. The three-year futures contract was last at 96.260, having dropped as deep as 96.230 to its lowest since November. The 10-year contract eased to 95.870.
The yield curve has flattened markedly in recent weeks as markets scale back the chance of an easing by the Reserve Bank of Australia (RBA). The RBA holds it March meeting next week and is widely expected to hold rates at 4.25 percent.
(Australia and New Zealand bureaux)
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