US bond news leads local market lower

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

The market performed solidly on Friday - as Asian investors responded positively to stronger US markets - but it wasn't enough to push the market into positive territory.

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

US economic data showed a decline in the number of US unemployment claims and a US flash manufacturing PMI reading that beat consensus. It kept alive talk of US tapering some time this year.

Reserve Bank governor Glenn Stevens told the annual Australian Business Economists' dinner in Sydney on Thursday night about the role the floating exchange rate had played in Australia's economic performance - it's the float's 30th anniversary in a few weeks.

He said 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 as a result. "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 FX strategy at BK Asset Management, Boris Schlossberg, said 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 RBA assistant governor Guy Debelle said the dollar was higher than he would like it to be and that the US held the key to it weakening.

It would be a "desirable thing" to hear that the US Federal Reserve had begun to taper its buying because it would meant the US outlook was strengthening.

"The sooner that day comes the better but that is not in our hands - it's in theirs."

For the week, BHP Billiton slipped 6¢ (0.2 per cent) to $37.45 after the mining giant said China's economic growth was resilient enough to drive strong demand for commodities for the next 15 years.

David Jones fell 12¢ (3.9 per cent) to $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 because of charges related to restructuring the company and challenging and seasonal market conditions.