The Australian dollar turned lower overnight amid renewed concerns of Japan's economic stability which dampened the appeal of higher yielding currencies. Meanwhile the mounting cost of Queensland's floods continued to put strain on the local unit coinciding with Prime Minister Gillard's proposed tax increases. News of Japan's downgrade last night saw the USDJPY briefly surge over 100 pips with the news also resonating across other currencies such as the Aussie which fell to lows of 98.75 US cents.

The Japanese Yen was among the biggest losers overnight as ratings agency Standard & Poor's downgraded the Japanese debt. Concerns of increasingly high debt levels, albeit mostly from private domestic investors saw S&P cut the nation's debt rating to AA- from AA.

width=272US markets also failed to inspire any real confidence as traders battled a series of mixed economic indicators showing a spike in the weekly jobless claims, lackluster durable goods orders. Nevertheless, a small concession to the weak data came from pending home sales which improved beyond estimates to record a 2.0 percent rise in November against the expected 0.5 percent contraction.

True to recent form the Euro was the standout performer with price action continuing to tread higher against major counterparts. It's all about interest rate expectations, and despite debt stricken European nations remaining in the firing line, it appears investors are all too willing to concentrate on recent comments from ECB president Jean Claude Trichet whom expressed a willingness to combat inflationary pressures if required.

With little in the way of market moving themes in the day ahead, we expect the local unit to continue to take its lead from local and Asian equities. For now it appears much of the impact of Japan's downgrade has been built into price action; however we could very well see continued concerns manifest in local and Asian equities which may prove to keep a lid on the local unit in domestic trade. At the time of writing the Aussie is buying 99.15 US cents.