The Australian dollar was unable to push away from the 0.88 level on Monday and weakened in local trading on Tuesday with a drop to test support levels below 0.8750 against the US dollar.

The domestic data was again weaker than expected with the retail sales increase held to 0.2% in November after a revised 0.7% increase the previous month while building approvals also fell after firm gains the previous month. The disappointing sales data followed the release of a record trade deficit the previous day and fundamental doubts over the currency are liable to increase.

The Australian currency was also hampered by caution over carry trades with a dip in capital flows from Japan. Underlying market stresses are liable to persist in the short term and this will tend to keep the Australian currency on the defensive, especially as 2008 interest rate expectations are liable to be revised down.