The greenback fell to the lowest level of 106.60 since 2005 against the Japanese yen after U.S. retail sales dropped in December, adding speculation that the economy is headed for recession. The single currency also rose briefly to 1.4923 against the dollar before retreating strongly to 1.4800 on profit-taking.

U.S. retail sales fell by 0.4% last month (forecast was unchanged), after a downwardly revised 1% gain in November. U.S. producer prices increased 6.3% in December from a year earlier, after a 7.2% pace in November. Interest-rate futures showed a 100% chance the Fed will cut its target rate for overnight bank loans to at least 3.75% this month, from 4.25% now. The chance of a cut to 3.5% is 38%, compared with zero a week ago.

The greenback started to decline as Citigroup Inc. reported a record quarterly loss of $9.83 billion, raising concern that financial companies' losses from home-loan defaults will mount. U.S. currency weakened to a record low of 1.0855 against the Swiss franc on speculation the Federal Reserve will cut its target interest rate as much as 0.75% this month to sustain economic growth and then rebounded on short-covering later in the day.

The British pound rebounded after U.K. inflation held above the Bank of England's 2% target for a third month in December. Cable extended to 1.9742 after the weak U.S. economic data and then retreated strongly to around 1.9610.

Wednesday will see the release of Japan’s domestic CGPI, current account and trade balance, U.K. RICS house prices, German CPI and HICP, U.K. ILO unemployment rate, eurozone HICP, U.S. CPI, capital flows, industrial production and Fed’s Beige book. Investors are also focusing the fourth-quarter earnings of JP Morgan to see how much the credit crisis is damaging banks' bottom lines and increasing the risk of a recession.