EU session review: Yen slumps as S&P downgrades Japanese credit rating; Aussie Dollar drops

Data released
10:00     EU(17)     Economic sentiment index (January)    106.5    106.8    106.6 (106.2)
10:00     EU(17)     Business climate indicator (January)    1.58    1.34    1.38 (1.31)
11:00     UK     CBI retail sales volume balance (January)    37%    41%    56%

The yen declined after Japan’s credit rating was lowered one step to AA- by Standard & Poor’s, the first cut since 2002, on concern Prime Minister Naoto Kan hasn’t done enough to curb the world’s biggest debt load.
The Japanese currency was lower, declining for the first day in five against the dollar.
“News of Japan’s rating downgrade spurred yen selling as it occurred,” said Koji Fukaya, chief currency strategist at Credit Suisse Group AG. “With domestic investors holding most of Japanese government bonds, the direct impact on the currency market will likely be small. Still, in the near term, the market will likely take this as a negative.”
“It will only have a temporary effect on the market,” said Lee Hardman, a strategist at Bank of Tokyo-Mitsubishi UFJ Ltd.. “Japan’s credit rating has been on negative watch for almost a year now so this is something which has been on the cards for some time.”
The euro strengthened against the dollar for the fifth- straight day as European Central Bank Executive Board member Lorenzo Bini Smaghi said imported inflation can’t be ignored.
The euro rose as French President Nicolas Sarkozy said European leaders would continue defending the currency union.
“It is of such importance that we will be there whenever it needs to be defended,” Sarkozy said in a speech at the World Economic Forum in Davos, Switzerland. “The consequences of a euro failure would be so cataclysmic that we can’t even entertain the idea.”
The Australian dollar fell after Prime Minister Julia Gillard announced a one-off levy to fund rebuilding after recent floods, damping demand for the South Pacific nation’s assets.

EUR/USD rose from $1.3630 to $1.3760 before retreated to $1.3720.

GBP/USD rose from $1.5880 to $1.5965.

USD/JPY rallied from Y82.10 to Y83.20 before it corrected to Y82.65. Later rate was back to Y83.00.

Attention is at Jobless claims and Durable goods orders, both at 13:30 GMT.