The single currency weakened to 1-month low of 1.3140 against U.S. currency on speculation that the European Central Bank will cut interest rates by at least 50 basis points to 2.00% on Thursday together with a sharp drop in the U.S. trade deficit in November.

European Central Bank President Jean-Claude Trichet said the euro zone economy is facing pressing challenges and that there is ‘no time for complacency’. The threat of ratings downgrades of some euro zone countries, including Spain and Greece, also pressured the single currency although Germany's stimulus package announced on Tuesday offers some hope.

U.S. trade deficit shrank to $40.4 billion in November, the smallest since November 2003 as weak consumer demand and plummeting oil prices led to a record drop in imports, from a revised $56.7 billion in October. The global economic outlook is worsening and the IMF is likely to cut its growth forecasts sharply.

The British pound tumbled from 1.4827 to 1.4470. The single currency fell against the Japanese yen from 119.58 to 117.13. The greenback rebounded from 88.80 to 89.88 and from 1.1140 to 1.1255 versus U.S. currency and Swiss franc. Australian dollar and New Zealand dollar fell sharply against the greenback from 0.6818 to 0.6577 and from 0.5743 to 0.5460 respectively.

Wednesday will see the release of German GDP, eurozone industrial production, U.S. retail sales and business inventories.