The Australian dollar has fallen sharply, hitting a multi-year low of 61.88 US cents — a level not seen since October, 2022.

Earlier on Wednesday, the dollar fell below the previous low of 61.99 US cents.

Analysts said a sell-off of the Chinese Yuan overnight led to Australian dollar weakness.

“The problem with the Australian dollar appears to be that there was a real wobble in the Chinese currency into New Year’s Eve,” InTouch Capital Markets senior FX analyst Sean Callow said.

“Particularly the version of the Chinese currency traded outside mainland China.

“It fell sharply and broke a key level and that seems to have spilled over to [weakness in] the Aussie dollar.

“The Yuan is really finishing the year on a very weak note under a lot of pressure.”

Mr Callow also told the ABC there was a “constant pressure on the Yuan, a lack of confidence in the outlook for China’s economy.”

The US dollar has also been a strong performer in recent weeks.

Analysts said that was due to a sharp winding back in expectations of future Federal Reserve interest rate cuts.

“The Fed”, as it’s known, is the equivalent of Australia’s Reserve Bank.

It indicated last month it was planning to potentially scale back the number of interest rate cuts it would announce.

Countries’ currencies generally rise in value when their central banks raise interest rates and fall when interest rates are lowered.

The rise in the US, or greenback, on expectations that American interest rates may not fall as much has led to weakness in the Australian dollar.

The Australian dollar has also fallen to 0.4940 British pence.

A falling Australian dollar against a basket of currencies can affect households and businesses differently.

For Australian tourists heading to the US, it can pose a problem to the hip pocket nerve, however, it can be welcome news for Australian exporters as their goods and services become more price competitive.

A falling Australian dollar can also put upwards pressure on inflation.

How far would the Australian dollar need to fall for the Reserve Bank to notice?

Mr Callow said he would be concerned that a fall below 60 US cents would erode a lot of “confidence” in the Australian dollar.

“There absolutely is pressure on the price of imports and it can show up quite quickly in some areas, most obviously petrol prices,” he said.

“We have seen the Reserve Bank show concern during the GFC at that level and in fact take action.”

Central bank action could involve holding back an interest rate cut to support the currency or going into the currency market to buy Australian dollars.

Social media posts suggest some in the community are watching the currency for this reason.

Mr Callow said if the Australian dollar were to fall below 61.70 US cents, which “would take nothing”, there was a risk it could fall to its COVID lows in the mid-50-cents range against the greenback.