At 12.00pm (AEST), the dollar was trading at $US0.8704/07, down from yesterday's close of $US0.8794/97.
During the morning, the unit moved between $US0.8712 and $US0.8672.
The dollar fell sharply during the overnight session, after Wall Street posted heavy losses and commodities prices eased, to open at $US0.8695/97 at 7.00am.
It was the local currency's weakest start to the domestic trading day since September 28, when it opened at $US0.8685/87.
Easy Forex senior dealer Francisco Solar said market participants had been surprised by worse-than-expected US manufacturing and employment data, and responded by selling out of risk-sensitive assets.
"That just caused markets to pull some risk off the table and a bit of an increase in risk aversion," Mr Solar said.
"Risk markets pretty much took a bit of a battering last night."
The ISM manufacturing index fell slightly in September, after economists had expected the pace of growth in the sector to continue expanding.
Separately, new figures showed 551,000 US people claimed unemployment benefits in the week ending September 26, also worse than market expectations.
The dollar had reached a fresh 13-month high of $US0.8860 yesterday.
The local unit managed to consolidate at about $US0.8700 during the morning, despite a weak start on bourses across the region.
"Considering what happened last night, it doesn't seem to be a game changer or a trend changer," Mr Solar said.
"There does seem still to be this sense in the market that things are somewhat improving worldwide and that the Aussie is a currency that is looking very good down the track."
Mr Solar said he expected the dollar to trade between $US0.8740 and $US0.8650 ahead of the US non-farm payrolls report for September - a key employment indicator - due Friday night.
"It's a tight range, but that's not surprising considering the enormity of the data release tonight and the ramifications it has for the markets in the short term," Mr Solar said.
The Reserve Bank's (RBA) trade weighted index (TWI) was at 67.5, down from yesterday's close of 68.2.
Meanwhile, the bond market was stronger.
The yield on the Commonwealth Government March 2019 bond was at 5.146 per cent, down from yesterday's close of 5.292 per cent, while the yield on the April 2012 bond was at 4.644 per cent, down from 4.791 per cent previously.
On the Sydney Futures Exchange, the December 10-year bond futures contract price was at 94.780, up from yesterday's close of 94.645, while the December three-year bond futures contract was at 95.150, up from 95.000 previously.
Gold eclipses $1,000Dollar lower on investor caution
