The Australian dollar is lower as it looks increasingly likely the US Federal Reserve will scale back its economic stimulus program throughout 2014.

At 0700 AEDT on Monday, the local unit was trading at 88.65 US cents, down from 89.06 cents on Friday.

After its December meeting, the Fed said it would reduce its bond purchases by $US10 billion to $US75 billion a month, starting in January, and would taper the purchases further depending on the strength of the US economic recovery.

BK Asset Management managing director Kathy Lien says policy differences between the US and Australian central banks continue to push the Australian dollar lower.

The Reserve Bank of Australia is expected to ease monetary policy, or cut its cash rate, in the new year, while the Fed is tightening monetary policy.

“Investors are divided on whether the RBA will ease again next year and until that uncertainty is lifted the Australian dollar could remain weak,” she said.

“If Fed tapering fails to drive the Australian currency lower and the Australian economy continues to grow below trend due to rising unemployment and weak demand, the RBA could pull the trigger (and cut the cash rate).”

Ms Lien said she expects the Australian dollar to gradually fall towards 85 US cents in the new year but not much beyond that.

“In a nutshell, we are looking for additional losses in the Australian dollar in the first half of the year followed by a recovery in the second half,” she said.

“In the near term, we don’t expect much movement in Australian rates but US interest rates will be on the rise and this compression in the interest rate differential should drive the Australian dollar lower against the US dollar.”