The dollar was sharply lower today amid rising concerns that the US central bank might soon take steps to start withdrawing the stimulus measures that have supported the world's biggest economy since the global financial crisis.
Minutes from the US Federal Reserve's January policy meeting revealed plenty of discussion about when and how the central bank should start tapering its $85 billion monthly bond purchases.
At 4.45pm AEDT, the Aussie was trading at $US1.0238, down from $US1.0362 late yesterday. It traded as low as $US1.0231 in Asia.
"There has been pronounced US dollar strength in the wake of the Fed minutes. With the possibility of the asset purchases being wound down ahead of schedule, this has propped up the greenback across the board," said Tim Waterer, a currency strategist at CMC Markets.
But Mr Waterer said there was no reason to expect any change at the Fed in the near term, warning that if the US central bank acts too early, it could be a disaster for world economy.
"Whilst the minutes highlighted the risks of ongoing asset purchases, a scenario where the Fed pulls the reins in asset purchases too soon comes with significant risk also," Mr Waterer said.
The concerns about the direction of Fed policy fuelled weakness across global equity markets, further weighing on the Australian dollar, which is traditionally seen as a barometer of global confidence.
It is a "return to risk-off. The US dollar spent the day consolidating its FOMC-induced gains as regional equities sustained heavy losses, particularly the ASX and Shanghai," Westpac said in a market note.
Australia's benchmark S&P/ASX 200 closed down 2.3 per cent at 4980.1, its biggest one-day percentage fall in nine months.
Reserve Bank of Australia governor Glenn Stevens will tomorrow appear before an economics committee of parliament. The RBA has kept the door open to lower interest rates in recent commentary, but appears to be in little hurry.
The RBA has slashed interest rates by 1.75 percentage points since late 2011 and said on Tuesday it saw evidence that the economy was starting to respond, albeit slowly, to the easy credit settings.
Still, the RBA has concerns about weakness in the country's job market and sees the historically high level of the Australian dollar as a headwind to economic growth.
Mr Stevens' term as governor is also up in mid-September, and his future might become a topic for discussion at the hearing.
Looking into next week, the release of fourth-quarter business investment data will provide an insight into the pace of a slowdown in mining investment in late 2012.
Policymakers are acutely aware that if mining investment contracts from its record levels, it will begin to crimp economic growth, putting demands on other parts of the economy to grow faster and buoy the overall economy.
