Australia, NZ dollars falter as Iran conflict spooks markets

• Aussie, kiwi dived before recovering their composure
• All eyes on RBA chief's speech on Tuesday
• Aussie bond yields fall with global yields

SYDNEY, March 2 (Reuters) - The risk-sensitive Australian and New Zealand dollars recouped most of their sharp early losses on Monday that were caused by a flight to safety after military strikes by the U.S. and Israel on Iran risked a protracted war in the Middle East.

Outsized moves in the two Antipodeans - often sold as proxies for global risk - retraced as oil prices retreated from their initial highs. Global stocks also pared some of the earlier losses. MKTS/GLOB

The Aussie AUD=D3 dived as much as 1.2% in early Asian trade to $0.7033, before steadying at $0.7107, just down 0.1% for the day. It has gained for seven straight weeks, with the February high of $0.7146 still the near-term resistance.

The kiwi dollar NZD=D3 was similarly down to $0.5948, but cut losses to be last 0.1% lower at $0.5986. It has support at $0.5940 but faces resistance at around 60 cents.

Over the weekend, the United States and Israel launched military strikes on Iran that killed its Supreme Leader Ayatollah Ali Khamenei. The Middle Eastern nation responded with missile barrages across the region, risking dragging its neighbours into the conflict.

Despite markets' rather measured response, the risk of a protracted war in the Middle East remained, with President Donald Trump warning operations in Iran could continue until Washington's objectives are all achieved.

Analysts at the Commonwealth Bank of Australia (CBA) said the Aussie dollar could fall several cents in the worst-case scenario.

"AUD/USD will fall below 0.7000 quickly this week because of the war in the Middle East, in our view," said Joseph Capurso, head of international economics at CBA. "Large rises in energy prices, large falls in global equity markets and a surge in volatility will weigh on AUD/USD and AUD cross rates."

The Aussie lost as much as 1.3% against the Swiss franc AUDCHF= earlier in Asia to break away from a 10-month high, although the move has been largely retraced now.

Down Under, data showed on Monday that inventories slipped 0.1% in the fourth quarter to add 0.2 percentage points to economic growth. The GDP report is due on Wednesday where forecasts are centred on a 0.6% gain, picking up from 0.4% the prior quarter.

Reserve Bank of Australia Governor Michele Bullock will deliver a speech on Tuesday morning and will surely be asked about the latest conflict in Iran and its implications for monetary policy, having just raised rates last month.

Investors sought the safety of bonds and gold on Monday. Three-year Australian government bond yields AU3YT=RR slipped 4 basis points to 4.223%. Swaps still imply a 75% probability for a rate hike from the RBA in May. 0#AUDIRPR