Dollar hits 2-month high against euro

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NEW YORK (CNNMoney) -- The dollar hit a two-month high against the euro Monday as a resurgence of concerns about Europe's unsustainable debt levels and a possible slowdown in the continent's economy took its toll.

The euro fell more than 1% to fall below $1.40 for the first time since March 16.

The euro was pressured lower by Fitch's three-notch downgrade of Greece, combined with Standard & Poor's cutting its credit rating outlook for Italy to "negative" on Friday.

"[Greece and Italy will] continue to weigh on eurozone market sentiment as the sovereign issues remain on the forefront of investors' minds," said Brown Brothers Harriman analysts in a note to investors.

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S&P's Italy downgrade in particular took currency traders by surprise. While Italy has its own share political and fiscal issues, it doesn't have the problems of Greece, Portugal or Ireland, Harriman analysts said.

"With rating agencies still clearly on the warpath, we can't rule out a downgrade here, but the case for a downgrade of Italy just isn't as glaringly obvious as the others," Harriman said.

Like Spain, a potential debt crisis in Italy could pose behemoth-sized financial and political problems for European policy makers.

"When we're talking about Greece, Ireland or Portugal, it's talking about relatively small economies inside the eurozone," said Brian Dolan, chief currency strategist with Forex.com. "Italy is the eurozone's third-largest economy and it will be very difficult to bail them out if things get worse."

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Traders broadly moved into risk-averse currencies. The euro struck a record low against the Swiss franc, while both the dollar and Japanese yen solidly rose against the euro.

Dolan expects the euro could fall as low as $1.30 in the near term.

Currency investors are also working through a series of disappointing European economic reports. The eurozone's Purchasing Managers' Index fell to 54.8 in May, missing forecasts that called for a reading of 57.5.

"There has been this erosion in Europe's fundamental economic outlook, and the concerns are that weaker economic growth is going to complicate Europe's debt problems," Dolan said.