The greenback dropped against the yen after the release of weaker-than-expected December U.S. retail sales and other data heightened market's expectation that the Fed will keep its benchmark interest rate unchanged in the foreseeable future. However, the U.S. currency held gains against euro after the European Central Bank kept its rate policy unchanged and President Trichet reiterated the importance of a strong dollar.

ECB left key benchmark rate unchanged as expected at its record low of 1%. Euro remained under pressure throughout European session as broad-based selling which started just before European opening from 1.4557 downwards had pushed price lower. European Central Bank President Jean-Claude Trichet suggested the bank's benchmark interest rate will be on hold for some time. He also stated that the economic outlook in the eurozone remains uncertain and recovery will likely be uneven. The single currency hit intra-day low of 1.4445 in NY mid-session but rebounded after release of the weaker-than-expected U.S. data. Euro ended the day down just 0.06%.

Japanese finance minister Kan said that exchange rates should be set by markets unless they move rapidly. The dollar rose against the yen on his comments and briefly climbed to 92.05 in European morning. However, the pair fell sharply after that and the fall picked up momentum after U.S. retails sales posted a drop in December. Core retail sales decreased by 0.2% in December (forecast was an increase of 0.3%) after an upwardly revised 1.9% in November. The dollar weaken to intra-day low of 90.84 in NY afternoon before stabilizing.

Despite falling to 1.6249 in European morning, cable rebounded strongly on active cross buying in sterling (eur/gbp tumbled from 0.8937 to 0.8867) after ECB kept its rate unchanged. The British pound later rose to 1.6347 in NY afternoon before trading sideways.

Data to be released to Friday include Swiss combined PPI, EU HICP final, trade balance, U.S. CPI, capacity utilisation, industrial production.