SYDNEY, Sept 6 (Reuters) - The Australian and New Zealand dollars were stuck near 10-month lows on Wednesday, undermined by persistent fears about China's faltering economic recovery and a spike in Treasury yields that has fuelled the dollar.
The Aussie steadied at $0.6378, after slumping 1.3% overnight to $0.6358. It has support at Tuesday's low but if it breaks that level, bears would be targeting $0.6170 which was last hit in October 2022.
The kiwi dollar hovered around $0.5883, having also tumbled 1% overnight, hitting $0.5860, its weakest point since early November.
The two currencies - usually treated as yuan proxies - have been in the doldrums since mid-August. They took a further knock on Tuesday when a survey of China's services sector showed activity expanding at its slowest pace in eight months.
The currencies tracked the offshore yuan lower earlier on Wednesday before getting some relief as Chinese state banks intervened to steady the yuan.
"The bottom line is the China story, how much the yuan can be supported because the Australian dollar is quite correlated to the yuan," said Mahjabeen Zaman, head of foreign exchange research at ANZ.
She expects the Aussie to remain around 63 cents throughout the third quarter before picking up to 65 cents in the fourth quarter.
"We think the dollar exceptionalism will continue into Q3... In Europe we got negative services PMIs to add to the manufacturing recession, which is again weighing on the euro, so clearly the dollar seems like the cleanest shirt in the dirty pile," she added.
Local data on Wednesday showed Australia's economy posted modest growth in the second quarter, a result that was taken in stride by the forex market. Rate hikes have worked to cool consumer demand and household consumption narrowly avoided a contraction.
Australian yields pared back earlier gains to be mostly flat on the day. Three-year government bond yields held at 3.817%, coming off an earlier high of 3.849%, while ten-year yields eased from a session high of 4.182% to be little changed at 4.148%.
(Reporting by Stella Qiu; Editing by Edwina Gibbs)
