The dollar rebounded from early lows against the US dollar and yen after the RBA confirmed it intervened to shore up the currency.
In recent trading, the dollar was buying 62.22 US cents, after earlier trading near its weakest level in more than five years. Against the yen, the dollar tumbled to 55.1 yen, its lowest level since the end of World War II, before gaining in recent trade to 58.73.
The Reserve Bank confirmed this morning that it had bought Australian dollars in a bid to ensure liquidity for markets.
''What it is increasingly worrying from Australia's perspective is that the Chinese economy is also on the verge of what would be classified as a hard landing,'' said Stephen Koukoulas, Global Strategist at TD Securities.
Stocks extended their falls, touching lows not seen since late 2004, with banks the biggest drag.
Around noon, the benchmark S&P/ASX200 share index was down 55.4 points, or 1.4%, to 3814 points. .
A weaker Australian dollar has mixed consequences for Australia's economy. Exporters with products priced in US dollars, such as mining companies, will book fatter profits in local currency terms.
Importers, though, will be paying more for their products - many of which can only be sourced from overseas - and Aussies planning holidays abroad may start looking closer to home.
And any increase in prices may slow the pace of further interest rates by the Reserve Bank as its board frets over the highest inflation in more than a decade.
Risky business
The Australian dollar's rise to almost parity against the US dollar in mid-July was tied to soaring commodity prices.
Now commodities are falling through the floor and dragging the currency down with it.
"All risky assets have taken a beating in the past week as risk aversion has returned with a vengeance," said Sue Trinh of RBC Capital Markets. "It's all came to a head on Friday."
The closely watched Reuters / Jefferies CRB index slumped a further 3% on Friday, undermining commodity stocks worldwide.
The unwinding of the so-called carry trade - in which Japanese investors in particular bought Australian dollars to benefit from a much higher interest rate than what's available at home - has also pummelled the Aussie.
The Reserve Bank's announcement this morning that it had intervened in currency markets came after speculation of a coordinated intervention by major global central banks circulated on Friday.
That co-ordinated effort "for now has put in place the base but further weakness in coming days below the (60.57 US cents) levels can't be ruled out,'' Ms Trinh said.
But Dr Cullen said banks were not facing a crisis in the short term, giving the government time to work on details of an extended scheme.
“They will get to a point probably this side of Christmas where they will be needing to review some of their existing loan facilities; now we have plenty of time to work through what an appropriate response might be,” he said.
Dr Cullen emphasised there was no need to rush the scheme through and it was crucial that it be carefully designed to suit New Zealand’s financial sector, which is overwhelmingly owned offshore.
New Zealand is among 13 nations named by BusinessWeek as most at risk from the global financial crisis.
The article compared New Zealand to Iceland because of its heavy dependence on foreign money to fund its current account deficit.
"Like Iceland, New Zealand was a favourite of investors playing the yen carry trade. And like Iceland New Zealand is hurting," the American magazine said on its website.
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