THE Australian dollar closed lower as financial markets offloaded commodity-driven currencies after China tightened monetary policy in a bid to cool its economy.
At 1700 AEDT, the Australian dollar was trading at 92.28 US cents, down 0.66 per cent from Tuesday's close of 92.89 cents.
During the day, the local unit moved between 91.88 US cents and 92.41 cents.
Financial markets were weaker across Asia after China's central bank lifted the capital reserves the nation's banks have to hold, in a bid to slow inflation.
The People's Bank of China (PBOC) increased the reserve requirements by half a percentage point for the country's big banks, effective on January 18.
Senior currency analyst with financial markets research group Forecast, Lee Wai Tuck, said growth assets such as resources, equities and commodity-driven currencies such as the Australian dollar weakened after the PBOC's decision.
On Wednesday, Australia's S&P/ASX 200 closed down 0.64 per cent, while Japan's Nikkei-225 index fell 1.15 per cent.
"The Aussie dollar, which you call a commodity/risk currency, has come off after the PBOC's tightening of the reserve ratio requirement by 50 basis points yesterday," Mr Lee said from Singapore.
"Markets take it as a sign that China is trying to cool the economy from overheating and inflation."
Mr Lee said markets were awaiting Thursday's release of official jobs data for December from the Australian Bureau of Statistics (ABS).
The market is expecting total employment to have increased by 10,000, with the unemployment rate rising 0.1 percentage points to 5.8 per cent.
The participation rate was expected to be 65.3 per cent in December.
At 1700 AEDT, the Australian dollar was trading at 84.09 Japanese yen, down from Tuesday's close of 85.68 yen, and at 63.70 euro cents, down from 64.08 euro cents previously.
The euro finished at 1.4488 US dollars, down from Tuesday's close of 1.4496 US dollars, and 132.00 Japanese yen, down from 133.69 yen previously.
The US dollar was at 91.12 Japanese yen, down from 92.22 yen previously.
Meanwhile, the Australian bond market closed firmer.
At 1630 AEDT, the yield on the Commonwealth Government April 2020 bond was at 5.584 per cent, down from Tuesday's close of 5.698 per cent, while the yield on the May 2013 bond was at 5.028 per cent, down from 5.112 per
cent.
On the Sydney Futures Exchange, the March 10-year bond futures contract was at 94.390, up from Tuesday's close of 94.280, while the March three-year bond futures contract rose to 94.910, up from 94.830.
Investors sought fixed-income assets after the decision by China's central bank.
"Markets have been spooked by the (China's) increase in reserves required, but that was a knee-jerk reaction, a bit of a storm in a tea cup," ICAP economist Adam Carr said.
"If China was serious about reigning it in, it would lift interest rates."
Mr Carr said the Australian bond market was in a holding pattern ahead of December's employment report from the ABS.
"As long as it's anywhere between minus 10,000 (jobs) and plus 20,000, it won't change the idea that the Reserve Bank of Australia will hike rates in February," he said.
"Anything above that modest range and you would see an aggressive sell off."
At 1630 AEDT, the 90-day bank bill rate was at 4.220 per cent, up from Tuesday's close of 4.180 per cent, while the 180-day bank bill rate was at 4.520 per cent, down from 4.540 per cent.
At 1600 AEDT, the Reserve Bank of Australia's trade weighted index (TWI) was at 71.1, down from Tuesday's close of 71.5.
Meanwhile, the Australian share market has declined for a second day, dragged down by miners after commodity prices fell, China tightened its monetary policy and as WorleyParsons cut profit guidance.
By the close of trade on Wednesday, the benchmark S&P/ASX200 index had fallen 31.4 points, or 0.64 per cent, to 4,868.1, while the broader All Ordinaries index declined 31.5 points, or 0.64 per cent, to 4,900.1.
On the Sydney Futures Exchange at 1612 AEDT, the March share price index futures contract was 42 points lower at 4,849 on a volume of 95,788 contracts.
"What cast a bit of a pall over the market ... was no positive lead from around the world or from commodities, as well as the downgrade from WorleyParsons," Austock Securities senior client adviser Michael Heffernan said.
Engineering and maintenance group WorleyParsons slumped $3.36, or 11.4 per cent, to $25.99 after it lowered its 2010 full year profit guidance, mostly blaming weaker conditions in its US operations.
The major miners were weaker after base metals declined overnight, and after China said that it was increasing the amount its banks have to hold in reserves in an effort to cool inflation.
BHP Billiton dropped 32 cents, or 0.9 per cent, to $43.12 and rival Rio Tinto slipped $1.25, or 1.6 per cent, to $77.12.
Iron ore miner Fortescue Metals fell 10 cents to $5.11, while aluminium producer Alumina declined six cents, or 3.1 per cent, to $1.90.
Coal miners also fell, with MacArthur Coal slipping 11 cents, or 0.9 per cent, to $11.59 and Whitehaven Coal losing 23 cents, or 4.2 per cent, to $5.23.
