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SYDNEY - The Australian dollar dropped for the second consecutive day to close at a two-week low, as fears of a global recession pushed the domestic share market to its weakest close in four years.
The local currency moved within a tight range as Reserve Bank of Australia
(RBA) intervention in the foreign exchange market appeared to restore stability.
At 1700 AEDT, the Australian dollar was trading at US$0.6417/22, down 1.82 US cents, or 2.8 per cent, from yesterday's close of US$0.6599/05.
It was the weakest local close since October 29 when the local currency finished the session at US$0.6410 US cents, a day after sinking to a five-and-a-half-year low of US$0.6012 cents.
The local unit today traded between a two-week low of US$0.6359 in morning trade, and an afternoon high of 0.6445.
The intraday low was 35 per cent below the 25-year high of US$0.9849 in mid-July.
The fortunes of the Australian dollar were tied to faltering share markets, with the All Ordinaries index shedding 5.4 per cent to post its weakest close since October 2004.
The blood-letting came after heavy falls on Wall Street overnight amid renwed worries about the faltering US economy and a change of the banking bailout plan by the American government.
Westpac chief currency strategist Robert Rennie said the risk of the Australian dollar falling closer to US$0.6000 would be "accentuated" if Wall Street's S&P 500 index sunk below 840 points tonight.
"That would be a sign the Aussie needs to move back down to the 60 (US) cent level," he said.
Mr Rennie said the Australian dollar had already suffered its biggest losses.
He said the Australian dollar struggled today as regional equity markets reacted to the growing prospect of a global recession.
"It does feel as if all the most recent legs lower in the equity market and risk trade has less to do with the credit crisis and more to do with the upcoming global recession that seems to be getting closer and closer," he said.
The Reserve Bank of Australia (RBA) intervented in the currency market this morning, for the first time in two weeks.
"We assess the liquidity in the market and react accordingly, which is what we have done," an RBA spokesman said.
"If illiquidity returns, yes we will (intervene)."
Mr Rennie said the RBA action gave the Australian dollar a "psychological boost" this morning.
The RBA last bought the Australian dollar on October 28, when the currency came close to falling below US$0.6000 for the first time since April 2003.
The Australian dollar was expected to take direction tonight from US share markets, with another fall on Wall Street tipped to push the currency back to US$0.6350 during offshore trade.
(CURRENCY SPOT PREVIOUS CLOSE)
AUD/USD 0.6417-22 0.6599-05
AUD/JPY 61.38-43 64.48-55
AUD/EUR 0.5148-53 0.5250-58
AUD/NZD 1.1435-58 1.1454-69
AUD/GBP 0.4313-19 0.4274-83
EUR/USD 1.2464-66 1.2563-66
USD/JPY 95.64-67 97.70-73
EUR/JPY 119.19-25 122.74-79
- AAP