The Australian dollar fell while bonds rallied on Thursday, as markets scaled back bets on more aggressive rate hikes from the Reserve Bank of Australia, after a speech by its governor opened the door to slower policy tightening.

In a speech on the policy outlook, RBA Governor Philip Lowe said the case for slower pace of rate hikes becomes stronger as the level of cash rate rises, and the RBA Board was not on a pre-set path.

The Aussie tumbled 0.8% to $0.6713 on Lowe's comments, although later recovered to hover around $0.6756.

The next big test for the Antipodean will be remarks from Federal Reserve Chair Jerome Powell later in the day, which are likely to reinforce the hawkish views that Fed may raise rates aggressively to rein in runaway inflation.

The New Zealand dollar eased 0.3% to be $0.6058, not too far away from its pandemic low of $0.5997.

The RBA lifted interest rates by half a point on Tuesday to a seven-year high of 2.35%, bringing the increase since May to a steep 225 basis points.

Just the hint of a possible slowdown saw futures lengthen the odds on another hike of 50 basis points in October, with rates now seen more likely to reach 3.0% by December, rather than 3.25%.

Three-year bond yields tumbled 18 basis points to 3.16% and ten-year yields dropped 14 bps to 3.588%.

Analysts at ANZ now expect the RBA to raise the cash rate by 25 basis points in November, compared with a hike of 50 bp before. It still sees a 50-bp hike for October.

"We acknowledge that there is a considerable risk that the RBA could slow its hiking to 25 bp in October, in which case we would expect an additional 25-bp hike early next year, leaving the terminal rate at 3.35%," said Adelaide Timbrell, senior economist at ANZ. (Reporting by Stella Qiu; Editing by William Mallard)