THE Australian dollar closed almost two US cents lower at its weakest level in eight months after a German ban on naked short selling lowered demand for high-yielding assets.
At 1700 AEST, the Australian dollar was trading at $US0.8585/91, down 2.1 per cent from its close of $US0.8766/68 on Tuesday.
Since 0700 AEST on Wednesday, the local unit traded between $US0.8517 and $US0.8637.
During the domestic trade the local unit reached US$0.8537, its lowest point since September 7 last year, according to IRESS data.
4Cast Head of Research Ray Attrill said it had been a fairly "crazy" 24 hours for currency markets.
The Australian dollar started the local session weaker following a move by German regulators to ban naked short selling.
Short selling occurs when traders bet on a stock or investment that they do not own or have borrowed.
Naked short selling - when a trader has yet to find another party - was cited as a factor in the turbulence on world markets during the 2008 financial crisis.
"It blew up in the German regulator's face really quickly, although the suspicion was that Germany was having a pretty hard time selling its contribution to the EU rescue package of two weeks ago to the domestic parliament," Mr Attrill said.
Mr Attrill said a fall in consumer confidence in Australia also helped punish the local unit.
"The fall that we had was not out of the ordinary in terms of what you would expect."
The Westpac-Melbourne Institute survey of consumer confidence fell seven per cent in May, its biggest monthly fall since the height of the global financial crsis in October 2008, with rising interest rates blamed largely for the drop.
"We expect that the most important factor causing such a large fall in the headline index was the rate hike," Westpac chief economist Bill Evans said on releasing the confidence data on Wednesday.
The Reserve Bank of Australia (RBA) lifted the cash rate by a further 25 basis points to 4.5 per cent on May 4, the third consecutive monthly increase and sixth since October last year.
Mr Attrill said the Australian dollar managed to claw back some ground and push higher into late afternoon trade.
"It's squeezed back up off its lows into London," he said.
Mr Attrill said the Australian dollar could be due for a recovery.
"We actually think we may be due for something of a bounce, for a bit of a sell off of the US dollar which would imply a bit of a recovery in the euro and the Australian dollar."
Meanwhile, the Australian share market closed at its lowest point in nine months as global turmoil again hit local stocks.
The benchmark S&P/ASX200 index closed down 83.6 points or 1.87 per cent at 4,387.1 points while the broader All Ordinaries index fell 85.7 points or 1.9 per cent to 4,414.3 points.
On the Sydney Futures Exchange at 1615 AEDT the June share price index contract was 99 points lower at 4,393 on a volume of 47,396 contracts.
