Euro drops after Portugal hit with ratings downgrade

The euro hit a one-week dollar low today after international ratings agency Moody's cut Portugal's sovereign debt rating, stoking fresh market concerns over the eurozone debt crisis.

The European single currency sank as low as 1.2533 dollars. It later recovered some ground to 1.2545 dollars, down from 1.2594 dollars in New York late Monday.

Against the Japanese currency, the dollar weakened to 88.36 yen from 88.62 yesterday.

Moody's said that it cut Portugal's debt rating by two notches to A1, citing the nation's worsening public finances and weak growth prospects.

The ratings agency said it expected Portuguese government trends to continue to deteriorate for "at least another two to three years," with the ratio of total debt to Gross Domestic Product eventually nearing 90 percent -- way over the European Union limit of 60 percent.

"The waters remain disturbed concerning the sovereign debt crisis and the move by Moody's to cut Portugal's rating to A1 has triggered some selling of the euro this morning," City Index analyst Joshua Raymond told AFP.

"Moody's said that Portuguese growth is likely to remain weak unless structural reforms bear fruit."

He added: "I do not think this took a lot of investors by too much surprise this morning which is why the market reaction for Europe as a whole has not been too severe thus far.

"What the cut does do, however, is reaffirm the fragility of credit ratings for those countries with high debts and any cut in credit ratings is likely to be seen as a vote of no confidence."

The euro was also dampened today by downbeat data in eurozone powerhouse Germany.

German investor confidence plunged for the second month running in July as investors saw limited potential for further improvement in the economy, the ZEW economic research institute said.

ZEW's closely watched but volatile financial sector index fell to 21.2 points from 28.7 points in June, a statement said.

In May, the measure had tumbled to 42.5 points amid fears that a German austerity packaged aimed at curbing the public deficit and debt would undercut economic growth.

The July reading was well below analyst forecasts for 26 points compiled by Dow Jones Newswires and the lowest level since April 2009.

In trading in London on Tuesday, the euro was at 1.2545 dollars against 1.2594 dollars on Monday, at 110.85 yen (111.63), 0.8323 pounds (0.8380) and 1.3329 Swiss francs (1.3354).

The dollar stood at 88.36 yen (88.62) and 1.0626 Swiss francs (1.0597).

The pound was at 1.5072 dollars (1.5026).

On the London Bullion Market, the price of gold eased to 1,204.65 dollars an ounce from 1,205.50 dollars an ounce on Monday.