The Australian sharemarket and dollar have been smashed as part of a global rout, after investors were spooked by the US Federal Reserve's clearest signal yet of a possible end to its multitrillion-dollar stimulus program.
As Fed chairman Ben Bernanke outlined the road map for a potential pull-back if the US economy improved as expected, an immediate sell-off was triggered on Wall Street, with the Dow Jones and the S&P 500 plunging by 1.4 per cent overnight on Wednesday in New York.
The US dollar soared against other currencies. The Australian dollar shed US2.5¢ in an initial decline that saw it hit a 33-month-low of US92.62¢. It was trading at a fresh low of US92.10¢ late on Thursday.
The sea of red was a sign of things to come. Global financial markets, anxious about whether the US economy could get back on its feet without the Fed's support, plunged at the start of trade. "People have been throwing out the baby with the bathwater," RBS Morgans senior trader Luke McElwaine said, adding investors were acting "without logic".
Locally, the benchmark S&P/ASX 200 was battered, recording its biggest one-day loss in more than a year. It fell 103 points, or 2.1 per cent, to 4758.4. The broader All Ordinaries slipped 97.9 points, or 2 per cent, to 4743.9.
Japan's Nikkei fell 1.7 per cent, and Chinese markets - hit by data showing growth in its manufacturing sector had hit its slowest pace in nine months - dropped by more than 2.5 per cent.
"If the sell-off is based off Bernanke's comments, then we've definitely overreacted and there's a bounce coming," Mr McElwaine said. "The problem is, is this sell-off suggesting that our economy is much weaker than we think?".
BHP Billiton fell 2.6 per cent to $32.15. Rival Rio Tinto finished 3.3 per cent lower at $52.60. Fortescue Metals plunged 6.6 per cent to $3.15 after the miner said it would not reach its 2013 production target.
Banks were also hit heavily. Westpac fared the worst, dropping 3.7 per cent to $28.16. ANZ closed 2.5 per cent lower and CBA slipped 3.1 per cent, while NAB shed 2.8 per cent. New Newscorp bucked the downward trend, surging 15 per cent to $16.75 in its second day of trade on the ASX. The new entity, which comprises the newspaper and publishing side of the business, began trading on Wednesday at $15.
"It's been given a very strong balance sheet and that's one of the key distinctive differentiators from its competition," BBY analyst Mark McDonnell said.
Westpac chief currency strategist Robert Rennie said the sharp decline in equities across the world was not surprising, given the trillions of dollars that has been pumped into the US economy since the Fed started its quantitative easing programs.
"If we go back to mid-2008, the Fed's balance sheet was about $US0.8 trillion - very stable," he said. "The Fed's balance sheet at the moment is $US3.4 trillion.
"For the US Federal Reserve to have gone out and bought essentially $US2.6 trillion of securities from mid-2008 to mid-2013 - that is a phenomenal injection of capital into financial markets. That is what has caused this sudden shock."
FXCM chief currency strategist John Kicklighter said the Australian currency was losing its appeal as investors moved away from riskier assets and back into the US dollar and US Treasury bonds.
"People are going to take that move away from the Australian dollar and exacerbate it," he said.
"People are seeing equities starting to pull back, commodities are starting to pull back and the high-yielding currencies [such as the Australian dollar] fall."
Despite the dramatic declines on the local sharemarket on Thursday, Mr Rennie said the reaction was a "normal knee-jerk contagion reaction" to the US fall. "My guess would be it won't be very long before the benefits of the fall in the currency [are seen] and the fact that this is going to make Australian financial assets more attractive for foreign investors, because they're 10 per cent cheaper than they were six weeks ago," he said.