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) -- The U.S. dollar was paring gains against the yen during Asia-Pacific trading hours, but the Australian dollar continued slipping against the greenback after bad economic news hit the currency markets on Thursday.

The U.S. dollar was trading flat at 82.87 yen during Asia-Pacific foreign exchange hours after hitting a three-week high of 83.22 yen during New York hours.

On Thursday, a softening of the yen set in after Standard & Poor's cut Japan's sovereign debt rating for the first time in nine years, citing the country's lack of a coherent plan to reduce its national debt.

Standard & Poor's cut its credit rating for the country by a notch to "AA-", three notches under the highest possible rating.

Japan's debt currently sits at 200% of its gross domestic product (GDP). That's even higher than Greece's debt load of 140% of GDP; Greece has been poster child for Europe's debt contagion woes.

"The big story today would be the Australian dollar because of the tax and the yen because of the downgrade," Brown Brothers Harriman's global head of currency strategy Marc Chandler had said on Thursday.

Weakness in the Australian dollar could be explained by concerns that Australia's new "flood tax" proposal would discourage consumer spending and encourage the central bank to leave interest rates unchanged.

Australia's prime minister Julia Gillard has proposed a A$1.8 billion ($1.79 billion) income tax measure to help fund the reconstruction of areas in the country ravaged by floods over the past month. Much of eastern Australia has been damaged.

Australia's currency remained weak in the Asia-Pacific hours as the yen licked its wounds. The Australian dollar fell 0.3% to 98.94 U.S. cents. It had fallen 0.7% to 99.20 U.S. cents during New York hours.

The U.S. Dollar index, which compares the U.S. dollar against a basket of mainly European currencies, remained flat at $77.75 amid the expectation of continued quantitative easing by the Federal Reserve and that the European nations will resolve their debt crisis within a few months.

"The belief that the Federal Reserve is going to continue with its 'QE2' and that some countries in Europe -- the eurozone, the Bank of England, Sweden and Norway -- could raise rates before the U.S. is dollar negative," Chandler remarked.

The rough composition of the currencies basket the dollar is measured against in the U.S. dollar index is 57.6% the euro, 4.2% the Swedish krona, 3.6% the Swiss franc, 11.9% the British pound, 13.6% the Japanese yen and 9.1% the Canadian dollar.

"I can just tell you I think the euro's going up. I don't have to fake it and find three people who agree with me," Chandler said.

DWS Investment GmbH, Germany's largest mutual fund, said the euro could rise to $1.50 by year-end from $1.37 currently amid the widely-held view that European nations could reach a major breakthrough in debt crisis resolution by the arrival of the European summit in March.

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-- Written by Andrea Tse in New York.

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