THE Australian dollar ended lower today after the US central bank began to reduce its monetary stimulus gave a boost to the American currency.
At 5pm (AEDT), the Australian dollar was trading at $US0.8900/05, down 0.61 per cent from yesterday's close of $US0.8957/59.
Between 7am (AEDT) and the local close, the unit traded between $US0.8888 and $US0.9020.
The US Federal Reserve said the interest rate it charges on emergency loans to banks would rise in a move to normalise lending after radical measures to lift the American economy from recession.
It said the hike in the discount rate, or the primary credit rate, to 0.75 per cent from 0.50 per cent would be effective on Friday.
In a statement, the Fed's board said that "in light of continued improvement in financial market conditions, it had unanimously approved several modifications to the terms of its discount window lending programs".
National Australia Bank head of currency strategy, John Kyriakopoulos, said the Australian dollar weakened after the US central bank announced its decision after the close on Wall Street.
"It has been under pressure for most of the day like most other currencies against the US dollar," Mr Kyriakopoulos said.
Financial markets had interpreted the move by the Federal Reserve as a pre-cursor to increases in the US federal funds rate later this year, Mr Kyriakopoulos said.
Expectations of rate rises lifts the attractiveness of a currency as investors seek to deposit funds that offer higher returns.
The US federal funds rate currently is in a target range of zero to 0.25 per cent.
However, comments by the president of St Louis Federal Reserve Bank, James Bullard, that the likelihood of a rate rise this year was unlikely helped stop the slide against the US dollar, Mr Kyriakopoulos said.
He said the appearance of Reserve Bank of Australia (RBA) governor Glenn Stevens before a parliamentary hearing in Canberra had little effect on the local currency.
"It ended up being a sideshow due to the US Fed's decision," he said.
"It did not give a clear idea about the RBA's moves on interest rates in March."
Economic data due in the US during Friday's offshore session include the consumer price index (CPI) for January.
Financial markets expect the US CPI to rise by 0.3 per cent in January after increasing by 0.1 per cent the previous month.
Mr Kyriakopoulos forecast the Australian dollar to trade between $US0.8840 and $US0.8950 during Friday's offshore session.
Meanwhile, the Australian share market finished lower today amid profit-taking and a fall on Asian bourses, dragged down after a surprise interest rate increase by the US central bank.
Australia's benchmark S&P/ASX200 index closed down 19.8 points, or 0.43 per cent, at 4,635.1 points, while the broader All Ordinaries index fell 17.6 points, or 0.38 per cent, to 4,656.3 points.
On the Sydney Futures Exchange at 4.15pm AEDT, the March share price index contract was 19 points lower at 4,606 on 28,028 contracts.
Australian shares started the session in positive territory but fell after Asian traders reacted negatively towards a decision by the US Federal Reserve to raise interest rates.
"Obviously the market came off pretty strongly when the Asian markets came online around midday," said IG Markets analyst Ben Potter.
"The concerns were weighing there after the discount rate hike by the US Federal Reserve this morning," said Mr Potter said.
The US Federal Reserve overnight increased the interest rate it charges on emergency loans to banks to 0.75 per cent, from 0.5 per cent.
Locally, National Australia Bank was the worst performer among the big banks, falling 70 cents, or 2.7 per cent, to $25.25.
The bank revealed flat cash earnings of $1.1 billion for the three months to December 31, compared with the same period a year earlier.
The result was weaker than Westpac's first quarter results unveiled recently.
Commonwealth Bank fell 19 cents to $52.81, ANZ was off nine cents to $21.96, while Westpac bucked the trend, rising seven cents, or 0.28 per cent, to $25.46.
Macquarie Group was off 93 cents to $46.25.
