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SYDNEY/WELLINGTON: The Australian and New Zealand dollars pared some losses on Wednesday as jitters over Italy's budget deficit calmed a little and prompted a pullback in safe havens such as the yen.

The Aussie dollar steadied at $0.7185, having been as low as $0.7165 at one stage. It was still down on Tuesday's top of $0.7236, but held above support around $0.7160 and $0.7140.

It got a mild lift when the Corriere Della Sera newspaper reported the Italian government planned to reduce its budget deficit to 2 percent of gross domestic product by 2021, rather than leave it at 2.4 percent.

Markets have been unsettled by speculation a widening deficit might pressure Italy's commitment to the European Union, leading investors to sell the euros for dollars and yen.

Those flows reversed a little on Wednesday nudging the dollar and yen down more broadly. That prompted short-covering in the Aussie which lifted it to 81.71 yen from an early trough of 81.30.

That ebb and flow outweighed Australian data showing approvals to build new homes fell a sharp 9.4 percent in August, confounding forecasts of a 1 percent increase.

While this series is notoriously volatile from month to month, the trend in approvals has clearly turned lower recently.

"Today's report is the clearest signal yet that the residential construction boom will unwind from here," said CBA senior economist Gareth Aird.

"Despite strong population growth, historically low vacancy rates and record low interest rates, it appears that falling home prices and a tightening in credit conditions will see residential construction decline over the next few years."

The New Zealand dollar was a shade softer at $0.6580 after a drop in prices for dairy, the country's top export, pushed the currency through a key support level.

"The break below $0.6600 technically signals a move to $0.6540 and then $0.6500," said Imre Speizer, market strategist at Westpac Bank.

A fortnightly dairy auction overnight showed prices for whole milk powder, New Zealand's top goods export, falling 1.2 percent, in contrast with futures markets' expectations of a 0.4 percent dip.

New Zealand government bonds gained, sending yields 2.7 basis points lower at the long end of the curve.

Australian government bond futures firmed, with the three-year bond contract up 3 ticks at 97.945. The 10-year contract rose 3.5 ticks to 97.3450.

Copyright Reuters, 2018