The Japanese yen fell sharply against major currencies after the Federal Reserve announced they will establish Forex swap lines with ECB and SNB to ease the credit squeeze by encouraging short- term lending among financial institutions. The Fed will inject cash to banks through up to $40 billion in two auctions this month and will provide $24 billion in currency swap lines to the European and Swiss central banks.

The Fed's first auction of term funds will be $20 billion on Dec. 17. The second, on Dec. 20, will provide up to $20 billion. The central bank plans two more auctions in January, with possible additional operations thereafter. European Central Bank Vice President Lucas Papademos said joint central bank action to tackle high rates on unsecured interbank lending has been planned for some time, and is not aimed at helping a specific bank.

The greenback rallied from 110.64 to a one-month high of 112.48 versus the Japanese yen. The single currency jumped to 1.4750 against the dollar due to active cross buying in euro before retreating later in the day on dlollar’s strength versus other major currencies. Euro, aussie and sterling rallied against the Japanese unit. from 162.19 to 165.31, from 96.59 to 100.02 and from 225.11 to 230.31 respectively.

Australian dollar and New Zealand dollar jumped versus the U.S. currency from 0.8728 to 0.8908 and from to 0.7729 to 0.7937 respectively the Fed’s announcement of the new liquidity facility and then pared most of the gains on dollar’s broad-based strength. U.S. currency fell briefly versus the Canadian dollar to 1.0055 after the release of widened Canada's trade surplus which came in at C$3.32 in October and then rose to 1.0178.

On the data front, U.S. trade deficit that slightly widened to $57.82 billion versus market expectations of $57.2 billion. September's deficit was revised up slightly to $57.12 billion from $56.45 billion. Thursday will see the release of Japan’s tankan report, German CPI and HICP, U.S. CPI, industrial production and capacity utilization.