(May 21, 2010)

By early afternoon the benchmark S&P/ASX 200 had fought back to be 99.4 points (2.3 per cent) down at 4217.1, after plunging 3 per cent in early trading. The All Ordinaries also pared steep losses but was still down 106 points (2.45 per cent) at 4236. The sharemarket was at its lowest level since July 2009.

The Australian dollar, which has fallen as much as 13 per cent in the past four weeks, also recovered some ground after this morning falling below US81 cents, to as low as US80.77c -- a 10-month low. It was trading around US82.30c by early afternoon.

UBS strategist Matthew Johnson said the Australian dollar's slide was simply a case of traders squaring out positions rather than a fundamental problem with the economy.

"There's nothing fundamental about this move," Mr Johnson said. "It's not like somebody woke up and discovered that China didn’t want iron ore anymore, people are selling (the Australian dollar) because they’ve got too much of it … and they’ve been told to cut it."

In the depths of the global financial crisis in 2008, the Australian dollar dived 30 per cent in just three months as investors unwound huge "long" positions -- a bet a currency will rise -- built up before the collapse of investment bank Lehman Brothers.

"There was a huge Aussie long before in the (global financial) crisis as well, but it's not nearly as big now as it was then so the collapse shouldn't last as long,” he said.

Mr Johnson also disagreed with some analysts predictions the Reserve Bank Australia would unlikely lift its key interest rate again this year, but admitted the lack of an imminent rise was further weighing on the Australian currency.

"That's not helping either as people who are long Aussie for the carry trade need the interest rate differential to keep it interesting for them," he said.

"(But) unless they've given up industrialisation in China then I just don't think you can say with any degree of confidence they'll be no hikes for the rest of the year."

Concerns of a slowdown in China also sent commodity prices lower and added to mounting worries about Europe's debt crisis and a spike in unemployment claims in the US, the world's biggest economy.

Asian markets weren't spared either, with Japan's Nikkei 225 average down 2.5 per cent by early afternoon. Hong Kong escaped for now as it was closed for a public holiday.

The local sell-off followed a disastrous session on Wall Street, with the Dow Jones Industrial Average slumping 3.6 per cent to close at 10,068.01 -- the measure's largest percentage drop since March 5, 2009.

The Dow is now down 3.45 per cent for the year and off 10.15 per cent from its 2010 closing high hit on April 26, meeting the technical definition for a correction.

In Australia the big miners led the falls, with mining giant BHP Billiton down 78 cents lower, or 2.12 per cent, at $35.97 and Rio Tinto $1.85, or 2.97 per cent, lower at $60.40.

Among the banks, Commonwealth Bank was down 52c, or 1.04 per cent, at $49.55, Westpac was one cent lower, or 0.05 per cent, at $21.81, NAB fell 40c, or 1.72 per cent, to $22.85, and ANZ lost 11c, or 0.53 per cent, to $20.52.

"Worries that the European debt crisis and slump in the euro might spark a second leg down for the global economy fuelled the selling, extending the recent declines," said Macquarie trader Gilda Bresic.

Some analysts predict more carnage could be on the way for the Australian dollar, with the next key testing mark at US77c.

National Australian Bank foreign exchange strategist John Kyriakopoulos said a close below US81.10c today could be the trigger for "real money" investors to liquidate long positions.

"Investors are now starting to place bets that structural headwinds to economic growth from sovereign-debt problems will overcome cyclical tailwinds from low interest rates and potentially send the world into another global recession," he said.

The Australian dollar also fell against the euro and pound, sinking from more than 20-year highs reached against both currencies in the past two weeks.

"Over three days in October of 2008, AUD/EUR collapsed 16.5 per cent, so the current fall is just as steep as occurred in the midst of the global financial crisis, although admittedly from a much higher level," said Mr Kyriakopoulos.

Also weighing on global markets is Germany's vote later today on the country's share of a €750 billion ($1.15 trillion) euro-zone bailout package and a warning from a US Federal Reserve official that a failure to contain Europe's problems could freeze markets and launch a replay of the 2008 crisis.

(Source: Business with the Wall Street Journal)