The greenback fell briefly to 102.65 against the Japanese yen (just above three-year low of 102.60) on speculation that banks will have to write off more mortgage-related debt, however, U.S. currency rebounded in late U.S. session as U.S. stocks trimmed losses.

The Standard & Poor's 500 index closed down 4.62 points or 0.35% at 1326.72, paring a drop of as much as 1.8% on late-day talk that a bailout of bond insurer Ambac Financial Group Inc. was imminent. The Dow Jones industrial average fell 45.10 points or 0.37% to end at 12213.80.

Bernanke said ‘principal reductions that restore some equity for the homeowner may be a relatively more effective means of avoiding delinquency and foreclosure’. Federal Reserve Governor Frederic Mishkin said signs of sluggish consumer and business spending and the potential for a deeper housing downturn and credit contraction pose serious risks to the U.S. economic outlook. Dallas Federal Reserve President Richard Fisher said a slowdown in U.S. growth would do less long-term economic damage than letting inflation mount.

Federal Reserve Vice Chairman Donald Kohn said the U.S. financial market correction is a necessary but painful episode, and one that will not end quickly. Kohn indicated U.S. banks face ‘challenging market conditions’ that will likely hurt earnings and consumer lending.

U.S. President George W. Bush said it was a mistake for OPEC to allow energy prices to stay high and hurt the economies of its biggest customers. The greenback rose broadly versus commodity currencies as crude oil price and gold price retreated strongly after his comments.

The single currency traded inside 1.5173-1.5250 range against the dollar on cross trading. The greenback fell briefly to 1.0337 and then recovered in late U.S. session. The British pound moves in a tight range of 1.9812-1.9894 on Tuesday.

Australian dollar tumbled versus U.S. currency after the release of much weaker-than-expected retail sales data although the Reserve Bank raised interest rates by 25 basis points to 7.25% and price subsequently weakened to 0.9218 due to the selloff in commodity prices. New Zealand dollar fell sharply from 0.8078 to 0.7958 against the greenback in tandem with aussie. U.S. currency strengthened against the Canadian dollar from 0.9852 to 0.9979 after the Bank of Canada cut Canada's benchmark rate by a half-point to 3.5% and said further ‘stimulus’ will likely be required.

Wednesday will see the release of U.K. Nationwide consumer confidence, eurozone and U.K. PMI service respectively, eurozone retail sales, U.S. ADP employment, productivity, labour cost, ISM non-manufacturing, factory orders and Fed’s Beige book.