The euro dropped to an 11-month low against the dollar on Tuesday, weighed down by fears of more rating downgrades in the euro zone, with the greenback supported by reduced expectations of further monetary easing following the Federal Reserve's less pessimistic assessment of the U.S. economy.
The Fed in its statement held benchmark interest rates steady and cited some U.S. economic improvement, but pointed to the euro zone sovereign debt crisis as a key risk for the world's largest economy..
"The quick take-away from the Fed statement is that there seems to be less chances of quantitative easing," said Tommy Molloy, chief dealer at FX Solutions at Saddle River, New Jersey. "Essentially what the Fed is saying is that the rest of the world is garbage and the United States is not doing so badly."
The euro fell as low as $1.30150 on trading platform EBS, its lowest since around mid-January. It was at $1.30240, down 1.2 percent, late Tuesday afternoon
Against the yen, the euro slipped to a more than two-month low of 101.490 and last changed hands at 101.560, down 1.2 percent on the day.
Losses in the euro earlier accelerated after it broke below its October low at $1.31450, followed by $1.31, and triggered a wave of automatic sell orders. Further key support levels lie around $1.30 and $1.2860, the 2011 low.
The euro was weighed down by news that Germany's Angela Merkel has rejected any suggestion of raising the funding limit of Europe's future bailout fund, the European Stability Mechanism (ESM), sources in her conservative bloc said after a meeting with the chancellor.
The ESM, which will replace the current EFSF bailout fund and should come into effect from the middle of next year, will have an effective lending capacity of 500 billion euros. European Council chief Herman Van Rompuy said on Tuesday that a review of whether funding was adequate would be completed in March.
"It continues to show how difficult it is to orchestrate all the moving parts of these different sovereign nations in Europe and try to get them all under one kind of agreement," said John Doyle, currency strategist at Tempus Consulting in Washington.
There was also discord at last week's European Union summit as Britain shunned an agreement reached by up to 26 EU nations to pursue fiscal integration as part of efforts to tackle the debt crisis.
Analysts said that while further downgrades were partly priced into the market, the impact of any cuts would vary across the region. A cut to France's triple-A status could threaten the top-notch rating of the region's bailout fund and weigh heavily on the euro.
"Absent any commitment from the European Central Bank to buy more sovereign debt, I think the outlook remains weak for the euro," said Brian Dolan, chief strategist at Forex.com in Bedminster, New Jersey.
"So now we're just waiting for the ratings agencies to see if they come in with downgrades. A downgrade to the EFSF would really hurt, because if that loses AAA, sovereign wealth funds in China and elsewhere would not be able to buy that debt," he said.
Moody's Investors Service said Monday it intends to review the credit ratings of all 27 EU states in the first quarter of 2012, while Fitch Ratings said pressure on their ratings had risen after the summit yielded no "comprehensive" crisis solution.
Standard & Poor's last week warned of possible downgrades of 15 euro-zone countries as well as the region's 440-billion-euro rescue fund -- the European Financial Stability Facility (EFSF). French President Nicolas Sarkozy prepared voters on Monday for a possible downgrade of the country's AAA credit rating.
Analysts said market liquidity was thin ahead of year-end holidays, which may hurt demand in sales of Italian and Spanish bonds on Wednesday and Thursday. Weak results would add to pressure on the euro.
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