· US Fed begins winding back stimulus program
· We want the dollar at 85 US cents: RBA

The Australian dollar has touched a three-year low against the greenback after the US Federal Reserve announced it will begin scaling back its massive stimulus program next month.

The local currency dropped to as low as 88.19 US cents just after 6am (AEDT) this morning, when the Fed said it will cut its monthly asset purchases by $US10 billion to $US75 billion. 

The dollar then rebounded, jumping to as high as 89.45 cents as investors began to digest the detail of US Federal Reserve chairman Ben Bernanke’s announcement.

At 8:10am, it was buying 88.49 US cents.

Many economists had been tipping that Ben Bernanke would do nothing today or do something modest, like a cut between $5 and $10 billion. That is what Dr Bernanke has done, in his final decision as chairman of the US Federal Reserve, after around eight fairly turbulent years.

It is the central bank’s first step towards winding back the stimulus that has helped the US recover from its worst recession since the 1930s.

The Fed has been spending $US85 billion a month in an effort to keep cash flowing in the US economy, and in the process, stimulate growth and jobs creation.

Dr Bernanke says the decision to “taper” the stimulus comes amid positive economic signs.

“Today’s policy actions reflect the committee’s assessment that the economy is continuing to make progress, but it also has much farther to travel before conditions can be judged normal,” he said after the Fed’s two-day policy meeting.

“Notably, despite significant fiscal headwinds, the economy has been expanding at a significant pace and the growth will pick up helped by accommodative monetary policy and waning fiscal drag.”

Dr Bernanke said the jobs market is improving, with the US unemployment rate continuing to fall.

“At the same time, the recovery clearly remains far from complete with unemployment still elevated and with both under employment and long-term unemployment still major concerns.”

US Fed boss Ben Bernanke has begun winding back US stimulus efforts. Photo: Getty

Markets lift as Fed signals it will keep interest rates low

Analysts have been expecting any reduction in stimulus spending to provoke a sharp fall on global share markets.

However, the Fed has signalled it plans to keep interest rates near zero, even if US unemployment rate falls below 6.5 per cent.

The jobless rate is currently at 7 per cent, and the central bank expects it to fall to 6.3 per cent next year, and hit 5.8 per cent in 2015.

The decision to keep interest rates low has given markets on Wall Street a boost.

The Dow Jones industrial average closed 1.8 per cent higher at 16,167 points, while the S&P 500 index climbed by 1.7 per cent to 1,810 points.

In Europe, London’s FTSE closed marginally higher at 6,492 points. Germany’s DAX surged by 1.1 per cent, to close at 9,181 points.