The euro hit a two-month low against the dollar on Monday as investors began to doubt that European leaders had done enough to end a sovereign debt crisis and braced for a possible mass eurozone credit downgrade. Markets rallied last week when the 17 countries that use the euro agreed to stricter budget rules. But optimism soon faded and investors resumed selling the euro and the bonds of indebted eurozone countries such as Italy and Spain.
"We're long on policy and a bit short on the detail, and in that sense, people are worried," said Stewart Hall, senior currency strategist at RBC Capital Markets in Toronto. The euro fell 1.38 percent on the day to $1.3188 after earlier hitting $1.3161, the lowest since early October. Losses picked up after the spread between peripheral eurozone bond yields and German bunds widened, triggering automatic sell orders in the currency market.
The euro is now 7.2 percent below its October peak and around 12.5 percent off its 2011 high of just under $1.50, struck in early May. The ECB was seen buying short-dated Italian bonds on Monday, but the volume was not sufficient to convince markets the central bank is about to step up its purchases beyond a reported weekly commitment of up to 20 billion euros.
The euro also shed 0.93 percent to 102.71 yen, while the dollar was up 0.45 percent at 77.88 yen. The lack of decisive measures to ease short-term pressure on eurozone countries and banks prompted warnings from all three major ratings agencies, with Moody's saying it intends to review the ratings of all 27 members of the European Union.
Fitch also said the summit failed to provide a comprehensive solution, and last week, Standard & Poor's said it may downgrade eurozone countries en masse should they fail to move decisively to stem the crisis. Its chief economist said in Tel Aviv that time was running out for the currency bloc and that it might need another financial shock to get the area reading "from the same page."
RBC's Hall said much eurozone sovereign debt was trading as if it had already been downgraded, suggesting "ratings agencies are playing catch-up." But he said a downgrade would be worrisome since it would likely subject the eurozone's bailout fund to a downgrade as well, which could add to pressure on the euro. Traders said that meant any short-term euro rebound will likely provide better levels at which to sell it, which could set up a test of the October low around $1.3145.