THE EURO tumbled to a 10- month low against the dollar yesterday after a credit downgrade for Portugal and uncertainty over an aid package for Greece undermined the currency.

Sentiment soured towards the euro after rating agency Fitch downgraded Portugal’s credit rating to AA- from AA, citing “significant budgetary underperformance in 2009” and “structural weaknesses” in the country’s economy.

The euro was already under pressure on reports that Germany and France had yet to agree on a rescue plan for Greece and the extent of any involvement by the International Monetary Fund (IMF) ahead of today’s two-day EU summit.

Camilla Sutton, currency strategist at Scotia Capital, said the potential involvement of the IMF in a bailout of a euro-zone country had weakened market confidence in the willingness of euro-zone members to stand behind a member nation.

Alan Ruskin of RBS Securities said it seemed increasingly likely that Europe would embrace the worst of all worlds for the euro by choosing a combination of an IMF and euro-zone emergency facility for Greece.

“Turning to the IMF encourages a view that the European Union is incapable of sorting out its own problems, with IMF voters in far-flung places now having a say over how a major economic problem with Europe-wide ramifications is solved,” he said.

On a more positive note, new economic data showing rising confidence and exports in Germany coupled with growing euro-zone manufacturing activity points to a recovery that is gathering pace.

The closely watched business confidence index from Munich’s Ifo Institute surged to a two-year high in March of 98.1, up almost three points from February.

The index, based on a survey of 7,000 German managers, showed a rise in the current and future expectations indices across manufacturing, construction, wholesale and retail sectors. “Spring has come to the economy,” said Ifo president Dr Hans-Werner Sinn.

Separately, the Markit preliminary purchasing managers index (PMI) for the euro zone showed a 39-month high in its manufacturing sector index of 56.3 in March, up from 54.2 in February. The services PMI rose to a 28-month high of 53.7 from 51.8.

A value above 50 indicates that a majority of managers have spotted a rise in activity, while a figure of lower than 50 signals a drop. – (Additional reporting: The Financial Times Limited 2010)