The Australian dollar weakened to lows just above 0.8750 against the US dollar in local trading on Tuesday as risk aversion intensified and regional stock markets were subjected to heavy selling pressure.
There was a reversal later in the session as stock markets stabilised and the Australian dollar also gained support from general US currency weakness with a move back to 0.89.
The domestic influences are likely to remain of secondary importance in the short term with global flows dominant. Although risk aversion has eased temporarily, underlying stresses are liable to continue with much reduced confidence in carry trades. The Australian currency will also be unsettled by a sustained drop in commodity prices with copper prices weakening on Tuesday.
The key feature is likely to be a sustained increase in volatility and any drop to below 0.8750 against the dollar would increase speculation over a sharper Australian dollar retreat.