The Aussie was last at $1.0223, having slid as low as $1.0170, versus $1.0227 late in New York. It was still down 1.3 percent for the week.
The Aussie managed to cut early losses after a closely watched inflation report came roughly in line with expectations. The outcome was not considered soft enough to prompt the Reserve Bank of Australia (RBA) to cut rates as early as August.
Interbank futures now imply a one-in-four chance of a cut to 3.25 percent next month, down from 60 percent on Tuesday.
Yet, the 1.95 percent pace of annual underlying inflation was more than tame enough to keep the door open to more easing should the European financial crisis deteriorates further.
Markets are fully priced for a 25 basis point-easing in September and see a total of 86 bps cuts by the end of the year.
"Normally, a low inflation result like this would be enough to see the RBA cut rates. But the difference this time around is that the RBA has already cut rates by 75 basis points in the past three months, (putting) them a little ahead of the game," said Paul Bloxham, chief economist at HSBC Australia and New Zealand.
He forecast the central bank's next move for September.
With inflation contained for some time to come, 10-year government bond yields hovered near historical lows at 2.74 percent, having bottomed at 2.68 percent on Tuesday.
Australian debt futures were mostly steady, having made hefty gains recently. The three-year contract was unchanged at 97.860 while the 10-year contract rose a touch to 97.285.
Australian debt has been a major beneficiary of massive inflows from central banks and sovereign funds desperate for returns as an increasing number of government bonds yields, including Germany and the Netherlands, are turning negative.
This is a major reason why the Australian dollar has been able to hold at relatively elevated levels despite the flare-up in risk aversion.
The Aussie has gained around 7 percent against the greenback since the June low of $0.9581, while it is hovering near record highs on the euro.
Still, as fears debt-ridden Spain might eventually need a bailout, the outlook for the local dollar remains heavily tied to offshore events.
"Today's move was almost entirely due to short covering," said David Scutt, a trader at Arab Bank Australia.
"Despite the optimism of the Reserve Bank of Australia and the willingness of investors to buy dips, the prospects of the Aussie are almost entirely based on what happens offshore, particularly in Europe."
Resistance is seen at $1.0290, with support at the July 16 low's of $1.0200, ahead of $1.0114, a 38 percent retracement level.
Against the euro, the Aussie trimmed earlier losses. The euro bought A$1.1802, not far from an all-time trough of A$1.1690 touched on Monday.
KIWI ALSO OFF LOWS
The New Zealand dollar slipped as low as $0.7808, its weakest since mid-June, before trimming some losses to trade around $0.7830 in late local trade, down 0.2 percent on the day.
The kiwi underperformed many major currencies, stumbling 0.3 percent versus the yen, considered a safe haven along with the US dollar.
The euro climbed nearly half a percent to a session high around NZ$1.5455, after stop-loss orders triggered around NZ$1.5380 and NZ$1.5400 boosted the single currency.
Overall, increasing risk aversion and sliding commodity prices has pushed the commodity-linked kiwi nearly 2 percent lower versus the dollar so far this week, knocking it down from around $0.8050 hit roughly a week ago.
Market participants said $0.7800 was providing strong intraday support for the kiwi, while $0.7766, the 50 percent Fibonacci retracement of its June-July rally, would also provide a cAFP
Still, they added the kiwi would remain vulnerable to any negative developments in the euro zone, which would prompt more investors to dump the higher-risk currencies.
Investors awaited a monetary policy announcement from the Reserve Bank of New Zealand on Thursday, but the central bank is widely expected to hold rates at a record low 2.5 percent through early next year.
Many in the market expect the RBNZ would also stick to its forecast for a patchy recovery of the domestic economy, which could be stung by the euro zone debt crisis, while highlighting concerns about a strong kiwi.
Such an outlook would have limited impact on the kiwi, they added.
"If the kiwi is going to move lower, it's going to depend more on risk-on, risk-off sentiment, and what's happening in Europe, rather than what the Reserve Bank is going to do tomorrow," said Tim Kelleher, head of institutional FX sales at ASB Bank.
New Zealand government bonds traded a touch higher, prodding the yield on 2021 bonds 2.5 basis points lower.