The Australian dollar plunged to its lowest level in a year, shedding over US2¢ in a session, as traders reacted to contradictory comments from the head of the US Federal Reserve on Thursday.
Currency, stock and bond markets were pummelled after US Fed chairman Ben Bernanke raised the prospect of a slowdown in bond purchases following his testimony to the US Congress on Thursday night.
Mr Bernanke had given an upbeat assessment of the US economy to the country's congressmen. But he had warned that "a premature tightening of monetary policy could ... carry a substantial risk of slowing or ending the economic recovery".
But in an unscripted Q&A session afterwards, Mr Bernanke also said if the US economy continued to improve, and if that improvement looked likely to be sustained, "then we could, in the next few meetings ... take a step down in our pace of [asset] purchases"."
Traders were spooked by the contradiction, and the US bond market was sold off sharply with yields on 10-year Treasury notes jumping above 2 per cent to their highest levels since mid-March. The selling fed through to global stockmarkets, with Australian shares losing more than $30 billion, suffering their worst daily loss in more than two months.
The Japanese stockmarket slumped by 7.3 per cent, while Europe's main markets slumped at the start of trading, with Frankfurt and Paris down more than 2 per cent following the rout in Tokyo.
It came on the same day as a shock announcement from Ford that it planned to close its Australian car manufacturing operations by 2016, citing the historically strong dollar and high wages.
Mr Bernanke's comments left analysts scratching their heads.
"Investors looking for clues on US monetary policy would have taken very different messages from Bernanke's prepared testimony and his subsequent Q&A session," said NAB's head of research in the UK, Nick Parsons .
"Critics could note that neither Mr Bernanke nor his [monetary policy committee] really know what they want and have been just as guilty of reacting to the latest economic data releases as the financial markets they seek to influence," he said.
Westpac's senior currency strategist, Sean Callow, said markets could remain fragile for weeks.
"At the earliest we are surely still months away from a gentle reduction in the pace of Fed quantitative easing," Mr Callow said.
"Yet Bernanke's Q&A seems likely to reverberate into at least the June 7 employment report, supporting the US dollar."
The Australian dollar could continue to fall over the next few days, possibly dropping as low as US94¢, a level not seen since October 2011, he said.
"I think the risks are mounting (that) we could see these falls accelerate," Mr Callow said.
The dollar was also hit by news that China's factory activity had contracted for the first time in seven months in May as new orders fell, a preliminary survey of purchasing managers showed.
The flash HSBC Purchasing Managers' Index for May fell to 49.6, slipping under the 50-point level demarcating expansion from contraction for the first since October. The final HSBC PMI stood at 50.4 in April.
It added to concerns that a recovery in the world's second-largest economy is sputtering, and hit Australia's mining stocks.
BHP Billiton slipped 39¢ to $34.88 and Rio Tinto fell $1.20 to close at $55.10. Fortescue Metals fell from 11¢ to $3.51, while Atlas Iron dipped 3.5¢ to 82.5¢.
The major banks and Telstra were the biggest losers as early falls extended throughout the day on the local market.
ANZ fell $1.17 to $28.13, Commonwealth Bank lost $1.99 to $69.71, National Australia Bank dropped $1.01 to $31.70, and Westpac fell $1.27 to $29.92.
Telstra shed 3.7 per cent to close at $4.95. This came a day after the company unveiled a restructure.
Making news on Thursday, James Hardie was down 9¢ at $10.36 after it reported a 92 per cent decline in full year net profit.
Changes to its asbestos liabilities and the effect of legal battles with the tax office hit the building products maker's bottom line.
DuluxGroup shares were 19¢ lower at $4.61.
US economic growth rose to a 2.5 per cent annual rate in the first quarter of this year, following a poor end to 2012.
The unemployment rate has fallen to 7.5 per cent, from a peak of 10 per cent, but remains well above its "longer-run normal level".
Late last year, Mr Bernanke tied US monetary policy to the unemployment rate, saying the Fed would consider easing policy when the unemployment rate fell towards 6.5 per cent.
On the local bond market, the June 10-year futures contract was trading at 96.705 (implying a yield of 3.295 per cent), down from 96.730 (3.270 per cent) on Wednesday. The three-year contract was at 97.410 (2.590 per cent), down from 97.420 (2.580 per cent).
ASX down 2%
Tokyo down 7%
Hong Kong down 2.5%