Further falls have been forecast for the Australian dollar, which yesterday dived below the US95c mark to levels not seen since October 2011.
Speculation that the US Federal Reserve will begin to slow its monetary stimulus sooner than expected, together with this week's weaker than expected gross domestic product data, saw the local currency fall to a low of US94.35c yesterday afternoon. It was trading at US94.80c in early overseas trade last night.
The sentiment dragged on Australian shares as the S&P/ASX 200 fell by 1.1 per cent to 4781.2 by the close -- a 4 1/2-month low for the bourse, which has seen stocks reverse by 9 per cent in the past three weeks.
The Australian dollar was the worst performer of all the G10 currencies yesterday, continuing its poor standing over the last week.
In the past five trading days it has fallen by 2.3 per cent against the US dollar, 2.6 per cent against the euro, 3.8 per cent against the yen and a similar amount against the Canadian dollar and other key currencies.
The dollar has lost about 8 per cent since the start of last month.
Deutsche Bank currency strategist John Horner said while the current sell-off had been overdone, with predictions that the currency would return to parity by the end of the year, there were longer-term forecasts of more sustained declines of the Australian dollar to about US90c by the end of next year and US85c by the end of 2015.
"Eventually we do see it moving lower as the US dollar recovery becomes more entrenched, and more particularly as we actually get closer to the Fed moving away from zero interest rate policies," he said.
"We think the impact of the taper will not be as significant, as we're only talking about an easing rather than any sort of tightening, which we don't see happening until 2015."
Concern that the US central bank would start "tapering" stimulus sooner than anticipated was one of the drivers of this week's fall in the Aussie dollar, along with weaker than expected GDP numbers that showed Australia's economy grew by only 0.6 per cent in the March quarter, missing expectations.
"The question mark around at the moment over whether and when quantitative easing will come to its end has been one of the things that have put upward pressure on the US dollar as capital has sought to move back to the US, and, of course, downward pressure on the Aussie dollar," HSBC chief economist Paul Bloxham said yesterday.
HSBC says the local currency is likely to fall further, reaching US90c by year's end and about US85c by the middle of 2014.
"We think that's probably a good thing for the Australian economy. One of the things that has been constraining growth in Australia has been the high level of the Australian dollar," Mr Bloxham said.
"(The declines will be) due to a combination in the improvement in the US economy which sees the US dollar rally further over the next 12 months and the fact that the Australian economy is going to be tracking a bit below trend . . . as the economy rebalances from a mining-led growth story to a non-mining led growth story."
Commonwealth Bank currency strategist Joseph Capurso said the Australian dollar would become more volatile.
The bank expects the currency to be at US96c by the end of the year.
"We think that the market's expectations of the US Federal Reserve tapering its asset purchases are premature. I think what will happen is that those expectations will change and they will push down US bond yields, push down the US dollar and that will push up the Australian dollar," he said.