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Australia, NZ dlrs falter on yen as risk aversion dominates

SYDNEY, March 23 (Reuters) - The Australian and New Zealand dollars stumbled to near 1-1/2 year lows against the Japanese yen as investors pulled away from risk amid fears a global trade war is looming and turmoil in the White House.

The Australian dollar fell to 80.50 yen, its lowest since November 2016. It slid 1.6 percent overnight for its biggest single day percentage loss since May 2017.

The New Zealand dollar also added on to overnight losses to hover around 75.7 yen, a level not seen since late 2016.

The declines came after U.S. President Donald Trump launched long-promised tariffs targetting up to $60 billion in Chinese goods, a move that provoked a belligerent reaction from the Asian giant.

"We will retaliate," Chinese ambassador Cui Tiankai said in a video posted on the embassy's Facebook page. "If people want to play tough, we will play tough with them and see who will last longer."

Adding to the woes, Trump shook up his foreign policy team again, replacing H.R. McMaster as national security adviser with John Bolton - a hawk who has advocated using military force against North Korea and Iran.

The nervousness around trade and geopolitical risks meant investors scurried away from stocks and the U.S. dollar to the safety of yen, euro, bonds and cash.

Australian government bond futures rallied, with the 10 year contract at its highest since January.

"If stocks continue under pressure, and if U.S. 10 year yields head below 2.78 percent we'll see the Aussie under pressure from that risk aversion," said Greg McKenna, chief market strategist at AxiTrader.

The 10-year Treasury is currently yielding 2.80 percent, down from 2.93 percent just two days ago.

"Many traders see the Aussie as a first or second derivative of China and Chinese growth so if a trade war does erupt expect the Aussie, as a deep and liquid proxy, to get hit," McKenna said.

Against the U.S. dollar, the Aussie was a tad firmer at $0.7710 after falling about 1 percent overnight.

The kiwi was also a shade stronger at $0.7219.

China is Australia's largest and most important trade partner, accounting for a third of Australian goods exports.

"Most of these goods are raw materials like iron ore and coal. These materials are then used in China to manufacture goods that may be subject to the proposed U.S. tariffs," said Diana Mousina, senior economist at AMP Capital.

"So, a trade disagreement between the U.S. and China has the potential to negatively affect Australian commodity demand but this is far from becoming certain." (Reporting by Swati Pandey; Editing by Neil Fullick)