The single currency tumbled after European Central Bank governing council member Yves Mersch said the central bank may revise down its eurozone growth forecast for growth of 1.5-2.5% this year and indicated that ECB should remain flexible on interest rates as risks to eurozone inflation were also increasing. Investors sold euro on speculation the ECB will cut interest rates this year.

Interest-rate futures indicated investors started to bet the ECB will lower its target this year for the first time since 2003. The implied yield on three-month Euribor futures contracts expiring in June fell 0.14% to 4.08%. The three-month interbank offered rate for the euro averaged 18 basis points more than the ECB's benchmark rate from 1999 until August.

Euro fell from 1.4860 to 1.4594 against the dollar on Wednesday and then pared some of the losses after European Central Bank President Jean-Claude Trichet confirmed that he still expected the eurozone economy to grow in line with potential in 2008.

Euro-region inflation held at 3.1% in December. ECB council members Michael Bonello, Lorenzo Bini Smaghi and Axel Weber all said this week that the inflation may return to the ECB's 2 % limit next year if oil prices ease and wages don't rise excessively,

The greenback dropped to as low as 105.92 against the Japanese yen earlier, the first time below 106 yen since May 2005, on widening losses in credit markets. However, the pair started to rebound after the release of U.S. capital flows and industrial production data. Net foreign buying of U.S. financial assets totaled $90.9 billion in November, from $114 billion the prior month. Economists expected a drop to $65 billion. U.S. industrial production was unchanged in December (forecast was a drop of 0.1%), after a 0.3% increase in November.

U.S. currency were supported as House Majority Leader Steny Hoyer said a legislative package designed to stimulate the slumping U.S. economy could be passed by Congress and signed into law by President George W. Bush within a month.

Fed's Beige Book indicated that the U.S. economy continued to grow in the final weeks of the forth quarter but the pace of activity slackened amid subdued holiday spending and a weak housing sector.

The U.S. currency also fell to a record low of 1.0838 against the Swiss franc on expectations U.S. financial companies, including Merrill Lynch & Co. will follow Citigroup Inc. in writing down the value of investments linked to U.S. mortgages. JPMorgan Chase & Co., the U.S.'s third-largest bank, said on Wednesday that profit fell 34% to $2.97 billion, after writedowns of $1.3 billion on subprime-mortgage investments. However, the pair rebounded strongly to 1.1025 on dollar broad-based strength in thin U.S. session.

Thursday will see the release of Japan’s industrial production, eurozone trade balance, U.S. building permits, housing starts, jobless claims and Philadelphia Fed survey. Investors are also focusing on the testimony by Fed’s Bernanke and the quarter-earnings report of Merrill, the world's biggest brokerage. Economists estimated it will probably report a record loss of $3.23 billion for the fourth quarter