The Australian dollar has plunged in value by almost 2 US cents in less than 18 hours, compounding a series of significant falls over the past days that have seen the value of the currency hit its lowest level since last September against its US counterpart - down more than eight per cent since the start of the month.
This morning, the Aussie dollar traded as low as US 85.28 cents, well down on the US87.23c it was buying in the late afternoon yesterday and a world away from the US92.7c it was buying at the start of May.
Data out today showed the biggest drop in consumer confidence since the global financial crisis. That news reinforces the market's view that interest rates will not rise any time soon - and low interest rates discourage foreign investors from buying Australian assets, effectively depleting demand for the local currency.
Investors are now predicting just one interest rate rise in the space of the next 12 months - just six weeks ago credit markets were pricing in five quarter-percentage point rises within a year - and that when the Reserve Bank board meets in June the official cash rate will stay at 4.5pc.
The overnight fall of a full US cent was caused largely by news German regulators would place a temporary ban on naked short-selling - a broking practice that relies on a fall in the value of shares or other investment, and one that is widely believed to have contributed to the turbulence in world markets during the 2008 meltdown.
Short-selling is when traders borrow shares they don't own and sell them in the hope their price will go down. If it does, they buy back the shares at the lower price, return them to their owner and pocket the difference.
In naked short selling, a trader sells a financial instrument short, betting that its price will fall, without first borrowing the instrument or ensuring that it can be borrowed, as would be done in a conventional short sale.
The announcement out of Germany prompted investors to turn away from what are often described as "risky assets," which include the Australian dollar.
"It caused a lot of uncertainty and fear in the market," said Darren Richardson, a corporate dealer with online currency trader OzForex.
"We saw moves away from high-risk assets like the Aussie dollar, the Canadian dollar, equities and commodities all coming off.
"Once we saw that negative impact of the German move, we saw a complete reversal of risk aversion and then the selling of high risk assets."
The German government said it was imposing the ban in the hope of keeping financial markets stable.
But it actually contributed to a sharp drop on Wall Street, where the major indices fell between 1 and 1.5 per cent.
And the embattled euro fell to a new four-year low against the greenback amid persistent market concerns over the European debt crisis. The euro dived to 1.2162 US dollars, its lowest level since April 17, 2006, in New York trade.
The Aussie dollar, however, is strong against the European common currency and last week hit a record of 71.49 euro cents. It was buying 70.11 euro cents this morning, well up on rates of about a year ago, when it was buying little more than 55.5 euro cents.
Email a friend