The Australian dollar came under pressure as the prospect of further monetary tightening in China undermined the currency.

That raised fears that rampant Chinese demand for Australian raw materials might diminish.

The Australian dollar remained resilient on Tuesday after the People’s Bank of China announced its third interest rate rise in the current cycle, lifting its deposit and lending rates by 25 basis points.

But the currency lost ground on Wednesday as speculation that Beijing would implement further tightening measures, such as raising bank reserve requirements, intensified.

Ian Stannard, of BNP Paribas, said it was clear that rising rising food prices and the drought in north-west China had reduced the country’s growth potential but had not removed the threat of higher inflation.

He said China would therefore still have to act to rein in inflation expectations and tighten monetary policy.

Mr Stannard said commodity traders would soon see that this new development would reduce China’s demand for raw materials, which in turn would hit the Australian dollar.

“The bottom line is that one should be prepared for the prospect of significant monetary tightening from China in the year ahead,” he said.

“Given the Australian dollar has been driven to overvaluation extremes by global liquidity, if Chinese authorities act to move ahead of the curve and raise rates, the Australian dollar will have a substantial scope to weaken,” he added.

The Australian dollar, which at the start of this year hit a 28-year high of $1.0253 against the US dollar, fell 0.4 per cent to $1.0106 by late trade in New York, eased 0.4 per cent to Y83.25 against the yen and fell 1.1 per cent to A$1.3578 against the euro.

Elsewhere in the region, the New Zealand dollar also lost ground, falling 0.5 per cent to $0.7715 against the US dollar after Bill English, New Zealand finance minister, admitted that the economy could have slipped back into recession in the second half of last year.