The Australian dollar is back below 88 US cents following interest rate hikes in Turkey and South Africa and the US Federal Reserve’s tapering announcement.

At 0700 AEDT on Thursday, the Australian dollar was trading at 87.50 US cents, down from 88.02 cents on Wednesday.

The Fed on Thursday morning (AEDT) said it would cut its monthly bond purchases by an additional $US10 billion, to $US65 billion, as the US economy continues to strengthen.

Overnight, South Africa’s Reserve Bank made a surprise decision to raise its interest rate, amid fears of rising inflation and sustained pressure on emerging market currencies.

On Wednesday, the Turkish central bank doubled its key interest rate to 10.0 per cent.

The Australian dollar initially rallied on the news from Turkey but followed emerging market currencies lower overnight, Westpac chief currency strategist in New York Richard Franulovich said.

“The Australian dollar has traded on the weaker side in the wake of the Fed decision but the weakness occurred well beforehand,” he said.

“The emerging market currencies weakened dramatically even though the Turkish central bank hiked, even though the central bank in South Africa hiked.

“Emerging market currencies took a big hit today and that’s filtered through to a weaker Aussie and then you had the Fed tapering as well and that sent the Aussie weaker again.”

AAP