By Wayne Cole
SYDNEY, July 21 (Reuters) - The Australian and New Zealand dollars were testing recent highs on Tuesday as a landmark deal on European Union recovery funding underpinned risk sentiment globally, while the Australian government committed to more stimulus at home.
After days of talks, EU leaders reached a deal on a 750 billion euro stimulus plan that narrowed yield spreads, particularly for Italian debt, and shoved the euro higher at the expense of the U.S. dollar.
That helped the Aussie nudge up to $0.7017 AUD=D3 having been as far as $0.7035, just short of the July top of $0.7038. It was also back in sight of major chart resistance at the June peak of $0.7069.
The kiwi dollar stood at $0.6566 NZD=D3 after reaching $0.6588, a whisker from its recent high of $0.6600. A break there would take it to ground last trod in January.
Reserve Bank of Australia (RBA) Governor Philip Lowe said that, while he would like to see the Aussie lower, it was hard to argue the currency was overvalued right now given the strength of commodity prices and Chinese demand.
Lowe also ruled out a shift to negative interest rates and argued there was no need to print money to fund government stimulus, given low yields and solid demand for its debt.
Three-year bond futures did ease slightly least week as the government sold a massive A$17 billion ($11.93 billion) of a new 2025 line, but Lowe said this was just market "indigestion" and would quickly abate.
Futures edged up to 99.700 YTTc1 on Tuesday and away from a four-month trough of 99.6800.
That resilience was welcome as the government announced an extension to much-needed job support programs that would cost billions in new borrowing.
George Tharenou, an economist at UBS, said the extra spending was larger than many had expected at A$20 billion, or more than 1% of annual GDP.
"This reduces the downside risk for growth and employment in Q4," he added. "GDP and employment are still likely to be better than we feared, with upside risk to our current forecasts."
Treasurer Josh Frydenberg is due to outline updated growth and budget forecasts on Thursday which will almost certainly include a sharp lift to borrowing plans.
($1 = 1.4247 Australian dollars)
(Editing by Shri Navaratnam)
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