Investors stay cautious as US considers stimulus windback

The sharemarket lost ground this week as investors absorbed news the US Federal Reserve might begin "tapering" its bond-buying program within months.

The sharemarket lost ground this week as investors absorbed news the US Federal Reserve might begin "tapering" its bond-buying program within months.

The bourse performed solidly on Friday, but it wasn't enough to push the market into positive territory.

The benchmark S&P/ASX200 Index dropped 70.3 points, or 1.3 per cent, to 5331.4 points, while the broader All Ordinaries Index fell 65.9 points, or 1.2 per cent, to 5330.3 points.

Asian markets performed well on Friday in response to positive US economic data, which showed a fall in the number of US unemployment claims and a US flash manufacturing purchasing managers' index reading that beat consensus. It kept alive talk of US tapering sometime this year.

Officials at the Reserve Bank of Australia made a couple speeches this week.

Governor Glenn Stevens spoke at the annual Australian Business Economists' dinner on Thursday night in Sydney.

This event had seen some interesting moments in the past: former governor Bernie Fraser chose it to announce to the world, in the early 1990s, what the RBA's inflation target would be.

This time around, Mr Stevens spoke about the role the floating exchange rate had played in Australia's economic performance (the 30th anniversary of the float is in a few weeks).

Mr Stevens took the opportunity to say that, with the currency remaining stubbornly high, despite a fall in the terms of trade, the central bank remained "open minded" to intervening in the foreign exchange markets to lower the currency.

The Australian dollar fell to a 2½-month low on his comments.

"Our position has long been, and remains, that foreign exchange intervention can - judiciously used in the right circumstances - be effective and useful," Mr Stevens said.

"It can't make up for weaknesses in other policy areas, and to be effective it has to reinforce fundamentals, not work against them.

"Subject to those conditions, it remains part of the tool kit."

The managing director of foreign exchange strategy at BK Asset Management Boris Schlossberg said afterwards that Mr Stevens' remarks "served to put the currency market on notice that the RBA is serious about using unorthodox means to lower the exchange rate".

On Wednesday, the assistant governor of the RBA, Guy Debelle, said the dollar was higher than he would like it to be and that the US held the key to the dollar weakening.

He said it would be a "desirable thing" to hear that the US Federal Reserve had begun to taper because it would mean the US economic outlook was strengthening.

"As we've said on a number of occasions, we would prefer [the Australian dollar] to be lower. One major thing that would do that would be the day [the US Federal Reserve] changes its monetary policy direction," he said. "The sooner that day comes the better, but that is not in our hands - it's in theirs."

For the week, miner BHP Billiton slipped 6¢, or 0.2 per cent, to finish at $37.45, after it said China's economic growth was resilient enough to drive strong demand for commodities for the next 15 years.

David Jones fell 12¢, or 3.9 per cent, to finish at $2.96, after its chairman apologised to shareholders over concerns about two board members buying shares in the company days before it released better-than-expected sales figures.

Elders remained at 12¢, after the agribusiness posted an annual loss of $505 million due to charges related to restructuring the company, as well as challenging and seasonal market conditions.

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