The greenback fell against the Japanese yen on Tuesday due to a sharp drop in stocks, adding concerns about a slowing U.S. economy. The single currency retreated against the dollar from 1.4745 on renewed cross buying in Japanese yen. Euro fell from 161.52 to 160.11 versus the Japanese yen.

U.S. stocks fell sharply after a report showed that phone company AT&T saw softness in its consumer business, boosting the expectation that the Fed would cut its benchmark target interest rate by 50 basis points to 3.75% at the Jan. 30 meeting. The Standard & Poor's 500 Index fell 1.8% after earlier gaining as much as 1%. Dow Jones index tumbled by 238 points.

Interest-rate futures showed 74% chance that the Fed will cut interest rate by 50 basis point on Jan. 30, up from 68% on Monday and zero percent a week ago. The chances for a quarter-point reduction are 26%, down from 92% a week ago.

The minutes of the Fed Board's discount rate meetings showed the Boston, Minneapolis and San Francisco Fed bank directors voted to request a 50 basis-point cut in the discount rate ahead of December's Fed policy meeting as some directors viewed a deeper cut necessary to ward off a more serious economic downturn.

Boston Fed President Eric Rosengren said the decline in U.S. house prices may worsen this year and heighten the risk of a ‘more significant downturn’ in the economy. Philadelphia Fed President Charles Plosser said further interest-rate cuts may be needed should the outlook for U.S. economic growth become ‘substantially weaker’ than already projected.

On the data front, U.S. pending home sales decreased 2.6% in November, following a upwardly revised 3.7% gain during October. The U.S. currency fell initially against euro, aussie and Swiss franc as U.S. pending home sales declined more than forecast in November. Australian dollar and New Zealand dollar rose against U.S. currency to 0.8840 and 0.7733 before retreating later in the day on active cross buying in jpy.

The greenback retreated versus Swiss franc from 1.1192 to 1.1119. The British pound rebounded briefly from 1.9666 to 1.9830 and then weakened again to close at 1.9735 on renewed cross selling in sterling.

Wednesday will see the release of U.K. Nationwide consumer confidence, German retail sales, trade balance and current account, eurozone GDP, German industrial production and U.S. leading indicators.