The euro dropped to an 11-month low against the dollar on Tuesday, weighed by fears of ratings downgrades in the eurozone, with the greenback supported by reduced expectations of further monetary easing following the Federal Reserve's less pessimistic assessment of the US economy.
The Fed in its statement held benchmark interest rates steady and cited some US economic improvement, but pointed to the eurozone sovereign debt crisis as a key risk for the world's largest economy. By contrast, the eurozone remains mired in discord and tension. 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 a review of whether funding was adequate would be completed in March.
"The euro is continuing to weaken as it becomes clearer and clearer that the Europe that we knew before the EU summit last Friday is still the Europe that we know today after the summit. Nothing has changed," said Tommy Molloy, chief dealer at FX Solutions in Saddle River, New Jersey.
The euro fell as low as $1.30090 on trading platform EBS, its lowest since around mid-January. It was last changing hands at $1.30300, down 1.2 percent on the day. The eurozone currency accelerated losses after the Fed statement came out less dovish than expected following earlier speculation that the US central bank could undertake some form of easing.
"The FOMC stuck to (its) boilerplate rhetoric that it is prepared to adjust the size of its asset purchase program 'as appropriate,'" said Marc Chandler, global head of currency strategy at Brown Brothers Harriman in New York. Against the yen, the euro slipped to a more than two-month low of 101.478 and last traded at 101.663, down 1.1 percent on the day.
Earlier losses in the euro 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 are seen around $1.30 and $1.2860, the 2011 low. 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. 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.