At 0700 AEDT on Friday, the Australian dollar was trading at 87.58 US cents, down from 88.03 cents on Thursday. The figure was weaker than expected and dipped below the 50 level which separates expansion from contraction. The result indicates that economic conditions in China are starting to slow, BK Asset Management managing director Boris Schlossberg said. "The Aussie reacted immediately to the news, dropping to 87.77 US cents as traders feared further slowdown in the Australian economy from waning demand out of China," he said. The Reserve Bank of Australia now finds itself in the most uncomfortable of policy choices. The central bank would like to see the Aussie weaken further towards the 85 US cent level to rebalance the country's terms of trade and make exports more competitive, but it must now face the prospect of inflationary pressures. Given the central bank's dovish bias, the Australian monetary authorities may ignore the bump in the CPI measures and continue to consider possible rate cuts as the year proceeds.