Euro hovers above 2-month low, still seen vulnerable

The euro hovered above a two-month low against the dollar on Tuesday but is seen capped by worries that the euro zone's debt crisis could spread to heavyweights like Spain that had been considered safe from contagion.

 Standard & Poor's cut its outlook for Italy to "negative" from "stable" on Saturday, while a crushing defeat for Spain's ruling socialists in local elections raised worries about Prime Minister Jose Luiz Rodrigo Zapatero's ability to meet fiscal targets. Madrid has been seen as an example of fiscal reform.

 "The huge storm of risk reduction will rip through markets if the focus turns to Spain and Italy. It's clear they don't have money to bail out these countries," said Ayako Sera, a market economist at Sumitomo Trust and Banking.

 "What we are seeing now could just be the beginning of it," she added.

 But euro buying from Asian central banks as well as stable commodity and regional share prices helped stem the euro's decline in Asian trade, with some traders saying that in the near-term there might be a small rebound for the single currency. more