Global markets have endured a wild ride for a second day, as investor jitters about a retreat in the US Federal Reserve's stimulus program led to a continued selloff in stocks, currencies and bonds.
The Australian dollar was on track to record its worst weekly loss against the US currency in almost two years, while the sharemarket continued its slide into negative territory on Friday before fighting back and closing just below its open.
The benchmark S&P/ASX 200 Index closed 19.6 points, or 0.4 per cent, lower at 4738.8. The broader All Ordinaries Index slipped 20.1 points, or 0.4 per cent, to 4723.8. The S&P/ASX200 fell 1.1 per cent for the week and is now up just 1.9 per cent for the year.
Asian markets, which, like Australia's market, have been victims of a reallocation of capital back to developed economies, behaved in a similar fashion on Friday. Investors had heaved a collective sigh of relief after Chinese authorities injected some liquidity into the country's financial system following a sharp rise in Sibor, the Shanghai interbank-offered rate.
"It has been an extremely stormy period for financial markets in the aftermath of the Fed meeting," said HSBC's Asia head of currency research Paul Mackel.
"Many in the currency markets were looking for some soothing comments from Bernanke, but he didn't give that comfort [that] market participants were hoping for and we saw a nasty move by the Australian dollar and other currencies as well."
The dollar experienced some respite against its US counterpart on Friday, recovering slightly after it reached an almost three-year-low of US91.64¢ early in the day. It was trading at US92.18¢ late on Friday.
The dollar has slipped more than 2 per cent for the week against the British pound and the euro, but gained 0.4 per cent against the yen.
Bonds were also caught up in the global selloff, driving yields for US 10-year Treasuries up about 14 per cent for the week. The yield on 10-year Australian government bonds rose to 3.7 per cent - an 11.7 per cent gain for the week. Bond yields and prices move in inverse directions.
The volatility in the markets could "remain elevated for some time" and potentially expose weaknesses in the global financial system, ANZ chief economist Warren Hogan said.
Mr Hogan said commodity currencies were in a cyclical down move, with ANZ forecasting the dollar to slip below US90¢ in 2014.
David Cassidy, UBS's head of strategy, said the Australian market experienced a more significant correction than some other markets this year as it has been "quite expensive". "We've obviously got more yield plays than just about anywhere else, so we're more vulnerable to the type of correction that has unfolded," he said.
Mr Cassidy said the slide in the dollar encouraged foreign investors to exit Australian equities, while emerging markets had been nervous about the slowdown in the Chinese economy.
Despite the negativity on the markets, analysts said stocks for export-oriented Australian firms would benefit from the slide in the local currency.
"The US dollar basket is still the most obvious tilt," CIMB analyst Shane Lee said. "But the complication for stocks like resources is that even though the Australian dollar is notionally delivering a big earnings benefit to them, you need some degree of certainty to the China outlook."
Mr Lee said while markets could remain on a roller-coaster ride in the short term, the falls this week meant much of the downward pressure was taken out of the system.
A key element in a possible recovery in Australia's currency would be China's economic growth later this year.
RBS senior currency strategist Greg Gibbs said the Australian dollar had "turned from safe haven to the No. 1 proxy for China's economy".