SYDNEY: The Australian and New Zealand dollars held huge gains on Thursday after markets scaled back wagers for outsized increases in US interest rates, triggering a vicious squeeze on short positions in currencies and bonds.

The Aussie was counting its luck at $0.7256, having surged 2.2% overnight in the biggest one-day jump since late 2011. The move wiped out a week of losses and put some distance between the currency and its recent three-month low of $0.7030.

It also came close to recapturing the 200-day moving average at $0.7284, which would be a major victory for bulls.

The kiwi dollar was likewise higher, at $0.6550, after rising 1.6% in its best performance since early 2020. That took it away from a recent two-year trough of $0.6413 and sets up a retracement test at resistance around $0.6555.

The startling turnaround came after Federal Reserve chair Jerome Powell played down the chance of a 75-basis-points-rise in rates, sounding merely hawkish rather than extremely so.

That forced the market to row back on its most aggressive pricing for future interest rate rises and sent US bond yields and the dollar sharply lower.

It also caught speculators very short of the Aussie and triggered a wave of stop-loss buying from $0.7160 to $0.7255.

Much the same happened in bonds, where three-year futures rebounded 17.5 ticks to 96.895 and reversed a steep fall suffered on Wednesday.

Investors also trimmed expectations for rate hikes from the Reserve Bank of Australia (RBA), with June futures now priced for a rise of 25 basis points to 0.60%. Early in the week the June contract was implying 0.75%.

The December contract still implies short-term rates at 2.86%, far above what most economists are forecasting. It has previously implied rates could top 3%.