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 sell-off 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/ASX200 index closed 19.6 points, or 0.4 per cent, down to 4738.8. The broader All Ordinaries index slipped down 20.1 points, or 0.4 per cent, to 4723.8. The S&P/ASX 200 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 have been victims of a reallocation of capital back to developed economies, behaved in a similar fashion. Investors had heaved a sigh of relief after Chinese authorities injected some liquidity into the financial system after 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 [US Federal Reserve chief Ben] Bernanke but he didn't give that comfort 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 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 Japanese yen.
Bonds were also caught up in the global sell-off, 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 Australian dollar to slip below US90¢ in 2014.
David Cassidy, UBS's head of strategy, said the Australian market saw a more significant correction than some other markets this year. "We've obviously got more yields plays than just about anywhere else, so we're more vulnerable to the type of correction that has unfolded."
He said the slide in the dollar also encouraged foreign investors to exit Australian equities, while emerging markets in general have been nervous about the slowdown in China.
The dollar could also continue to unwind if investors became more risk averse and continued their flight from high-yielding currencies, FXCM strategist John Kicklighter said. "[Investors] chase down the rather anaemic rates of returns and suffer little risk for it because the Federal Reserve is always going to be there to back them up on their positions.
"But they are starting to realise that is not the case and that exceptional amount of risk they have taken to chase down yield that are so historically thin is really starting to come back down."