NEW YORK (Reuters) – The U.S. dollar rallied broadly, while the euro fell to 10-month lows on Wednesday, after a rating downgrade for Portugal added to worries over debt levels and growth in some of euro zone’s smaller countries.

Fitch Ratings lowered Portugal’s sovereign credit rating to AA-minus from AA, with a negative outlook. For details, see [ID:nWLB0770]

An already weak euro fell to the day’s low of $1.3329, its lowest since early May 2009.

Traders said a raft of stop-losses had been hit near the $1.3440/30 area in Asia and later in Europe, contributing to the declines.

In the United States, economic reports on new orders for manufactured goods and housing data were mixed [ID:nN2396707] and [ID:nN2396501].

But analysts said the lackluster figures would not prevent investors from buying more dollars.

“Sovereign credit worries in Europe and Japan are leading to some general risk aversion,” said Michael Malpede, a market analyst at Easy Forex in Chicago.

Michael Woolfolk, a senior currency strategist at BNY Mellon in New York also said the data was taking a back seat to to general, speculative U.S. dollar buying, after euro-dollar trades had a big technical breakdown overnight.

The downgrade of Portugal was a good excuse to keep selling euros, according to Woolfolk.

“This may be short-lived, but I think we could get to 1.30 in euro-dollar by the end of the week,” he said. “A move to 1.25 would probably require a more negative fundamental story on the euro zone and Greece in particular, but such a move can’t be discounted completely.”

In late morning trading in New York, the euro was down 1.1 percent at $1.3343 EUR=. At current prices, it was the biggest one-day move since Feb. 17.

Against the yen, the dollar was 1.5 percent higher at 91.73 yen JPY=, after touching a session high of 91.96 yen.

The single currency got little help from a rise in the German Ifo institute’s business climate index, which climbed to 98.1 from 95.2 in February, higher than forecasts for 95.8. [ID:nLDE62N0R4]

“The euro is independently weak, with a significantly better-than-expected reading on the German Ifo proving only a temporary distraction from the problems in the periphery,” said Adam Cole, global head of FX strategy at RBC Capital Markets.

The market will keep a close eye on an European Union summit on Thursday and Friday, after Germany signaled for the first time that it may accept European financial aid for Greece as a last resort.

But Germany pegged its support to several conditions, including the need for the International Monetary Fund to make a “substantial contribution.” [ID:nLDE62M130]

“Germany is absolutely right in not being bullied into a quick fix — when it comes to government problems, whether in Greece, the United States or elsewhere. Quick fixes are difficult to come by,” Axel Merk, of Merk Mutual Funds, said in a note.

DOLLAR GAINS

Investors flocked to the perceived safety of the U.S. currency, pushing the dollar to its highest since May last year against a basket of currencies. The dollar index, which tracks the performance of the greenback versus six other major currencies, was up 1.1 percent at 81.797 .DXY.

The greenback hit a two-week peak against the Swiss franc at 1.0716 CHF=, according to Reuters data. And the euro traded flat versus the Swiss franc at 1.4272 francs EURCHF=, after hitting a fresh record low at 1.4233, according to Reuters data.

Swiss National Bank President Phillip Hildebrand said on Tuesday the central bank would keep fighting excessive franc appreciation. But traders expect it to shy away from large-scale intervention as the economy recovers. [ID:nLDE62M0D9]

Higher risk currencies such as the Australian AUD= and New Zealand dollars NZD= also fell 0.7 percent against the U.S. dollar.

(Additional reporting by Steven C. Johnson in New York and Tamawa Desai in London)

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