By Wayne Cole
SYDNEY, Jan 3 (Reuters) - The Australian and New Zealand dollars faded further away from five-month highs on Friday as speculators took profits on recent gains, while weeks of wildfire disruptions threatened to weigh on the Australian economy.
Both also took a hit on the safe-haven yen when the Pentagon confirmed U.S. air forces had killed a senior Iranian military official at Baghdad airport.
The Aussie dropped 0.8% to 75.26 yen JPY= as stop-losses were tripped on a break of 75.60 support.
It eased 0.4% on the U.S. dollar to $0.6968 AUD=D3 after topping out at $0.7032 earlier in the week.
The failure to clear a July high at $0.7082 left it vulnerable to a pullback to support in the $0.6930/40 area.
The story was much the same for the kiwi dollar which lapsed to $0.6674 NZD=D3, having got as far as $0.6755 on Tuesday.
Again it stopped short of the July top at $0.6789, risking a retreat to support around $0.6650.
Bonds benefited from the sudden souring in risk sentiment with Australian three-year bond futures YTTc1 firming 6 ticks to 99.180. The 10-year contract YTCc1 rose 8.5 ticks to 98.7250.
Domestic events were also favouring debt as raging bushfires across Australia's most populous states darkened the national mood and disrupted the lucrative tourist trade at the height of the summer season.
"The seemingly never-ending Australian bushfire disaster is another drag on the economy," warned Shane Oliver, chief economist at AMP Capital.
"The increasing risk is that because they are so widespread and going on for so long they will lead to a noticeable negative disruption to economic activity and will increasingly weigh on the national psyche further depressing consumer spending."
Household consumption had already been the weakest sector of the economy last year as sluggish wage growth weighed on confidence.
Not even three rate cuts from the Reserve Bank of Australia (RBA), a round of tax rebates and a revival in home prices had been able to resuscitate retail sales.
Markets duly narrowed the odds of a further RBA easing this year with futures 0#YIB: implying a 58% probability of a quarter-point cut in the 0.75% cash rate in March.
(Editing by Shri Navaratnam)
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