The Australian dollar dropped as much as 3 percent to a six-week low against the US currency in just 24 hours as the taste for risk soured and central banks pumped money into banking systems to counter a credit squeeze.
The local currency dived as much as 4.4 percent versus the yen to an 11-week trough of 99.01 yen, as investors dumped riskier bets on borrowing the low-yielding Japanese currency to invest in high-yielding currencies, dubbed carry trades.
"I suspect we are somewhere near the bottom, but it is just too difficult to be sure," said Richard Grace, chief currency strategist at Commonwealth Bank of Australia.
"Historically, when there has been an unwinding of carry trades, this is about as far as it tends to fall in percentage terms. There are probably more skeletons to come out of the closet, so from that perspective we could be in for further selling."
The catalyst for the latest round of instability in financial markets, which have gyrated these past two weeks on the widening fallout from the US subprime mortgage debacle, was news a large French bank had frozen three funds due to the subprime crisis.
The Aussie dollar was quoted at $0.8409/14, compared with $0.8659/64 here late on Thursday, according to Reuters data. The session low was $0.8402. It has fallen 5.3 percent since its July 25 18-year peak of $0.8871. "We rely on foreign markets to fund our current account deficit," said Westpac chief currency strategist Robert Rennie.