The euro fell to a one-year low yesterday and European stocks slid after Standard & Poor's cut Spain's credit rating, raising anxiety over sovereign risk in the eurozone, while US equities largely managed to maintain gains ahead of the Federal Reserve's interest rate decision.
The downgrade on Spain sapped the euro's efforts to regain ground on news of an aid package that emerged from a meeting between German officials and the head of the International Monetary Fund in Berlin yesterday.
On Tuesday S&P had slashed its ratings on Greece to junk status and downgraded Portugal. IMF Managing Director Dominique Strauss-Kahn estimated an aid package for Greece at 100 billion to €120 billion over three years, according to German officials who met with him.
"The hesitant and haphazard reaction of eurozone policy makers to Greece's predicament underscores the dangers of contagion," Marco Annunziata, chief economist at UniCredit Group wrote clients.
"The eurozone has taken over six months to react and is allowing uncertainty to persist nearly to the eve of the May redemptions - this does not bode well for their ability to react quickly should a second flashpoint burst," he noted, referring to Greek debt payments coming due next month.
Investors responded to the Spain downgrade by pumping cash into the traditional safety of gold, though there was little reaction in US. Treasuries ahead of the Federal Reserve's interest rate decision and policy statement as well as an auction of five-year notes.
The euro fell to a one-year low of $1.3112, before trading down 0.24 per cent at $1.3131. The US dollar index, a measure of the greenback against a basket of major trading-partner currencies, rose 0.62 per cent .
Bund futures rose after the Spain downgrade - one notch to AA from AA-plus - while the Spanish/German 10-year bond yield spread edged out to 119 bps from 116 bps.
European share prices fell for a second straight session as the Spain downgrade came at the tail end of the trading day, with banks leading the fall. S&P said it was concerned about a more protracted period of sluggish growth than previously expected.
The 10-year Greek/German government bond yield spread narrowed to 879 basis points after earlier peaking at more than 1,000 basis points. At one point the Greek government's two-year debt yield surged to 38 percent.
In early afternoon trade, the Dow Jones industrial average was up 47.53 points, or 0.43 per cent, at 11,039.52. The Standard & Poor's 500 Index was up 6.56 points, or 0.55 per cent, at 1,190.27. The Nasdaq Composite Index was down 2.49 points, or 0.10 per cent, at 2,468.98.