By Deborah Levine and William L. Watts, MarketWatch
NEW YORK (MarketWatch) — The dollar pared gains against most major currencies on Tuesday, as continued worries about Europe's debt crisis weighed on equities.
The euro EURUSD -0.33% fell to its lowest level in more than two years before retracing some ground to buy $1.2097 from $1.2133 in North America late Monday.
The ICE dollar index DXY +0.16% , which measures the greenback against a basket of six major currencies, climbed to 83.804 from 83.640 Monday.
U.S. stocks traded lower, with the Dow Jones Industrial Average DJIA -0.69% losing 0.5%.
After the U.S. market closed Monday, Moody’s Investors Service cut the outlook on its triple-A credit ratings for Germany, the Netherlands and Luxembourg to negative, saying those countries may have to take on a growing burden as policy makers struggle to deal with growing problems in Spain and Italy. Read more on the Moody's downgrades.
The problem is that if international investors want to leave the crisis-ridden peripheral countries and “cannot turn to the core countries (which have been supposed to be stable so far), they will necessarily have to invest outside the euro area and thus to sell euro,” said strategists at Commerzbank.
The purchasing managers' index for the euro zone stayed unchanged in July, signaling a sixth straight month of contracting private-sector activity across the region. Read about euro-zone PMI.
Weakening economies make it even harder of countries to service their high debt burdens, and raises the risk that Spain or even Italy will need international financial support.
“The chief concern is whether or not Europe, the [International Monetary Fund and the European Central Bank] can afford to bail out Spain, and maybe even Italy,” said Kathleen Brooks, research director at Forex.com.
“It is still unknown whether or not the euro zone could survive if its fourth largest economy collapsed, and this is likely to weigh on markets for some time.”
During the Asian session, HSBC reported that its initial monthly reading of China’s manufacturing activity hit a five-month high, though the sector continues to contract. Read more on China's HSBC flash PMI.
That gave the Australian dollar AUDUSD +0.03% a mild boost, rising to $1.0288 compared with $1.0279 late Monday.
Among other major currencies, the British pound GBPUSD +0.07% reversed a loss to trade at $1.5535, up slightly from $1.5523 Monday.
Against the Japanese yen, the dollar USDJPY -0.24% edged down to ¥78.19, from ¥78.38.
Deborah Levine is a MarketWatch reporter, based in New York.
William L. Watts is MarketWatch's European bureau chief, based in Frankfurt. Virginia Harrison in Sydney contributed to this report.
