The euro extended losses against the dollar on Thursday, following a political crisis in Portugal and Moody’s downgrading of the debt rankings of smaller Spanish banks.

The euro fell to a day's low against the USD at $1.4049 in early European trade, before recovering to $1.4080. The single currency retreated from a four-and-a-half month high of $1.4249 reached on Tuesday.

Portugal's Prime Minister Jose Socrates resigned on Wednesday as the parliament voted against the budget cuts proposed by his government. This led to the renewed worries on the extent of euro zone's sovereign debt crisis.

Moody’s downgraded the debt of 30 Spanish banks by at least one notch, citing concerns over Spanish sovereign's ability to extend a full bailout for the country’s banking system.

“It is, in Moody’s view, increasingly likely that the sovereign will not be prepared to write all banks a blank cheque, which is a key driver in Moody’s decision to reduce its support assumptions for Spanish banks to more normalised levels,” the rating agency said.

Earlier this month, Moody’s downgraded Spain’s debt by one notch to Aa2, citing concerns over the cost of restructuring of the country’s banking sector and also the government’s ability to reach its borrowing reduction targets.

While the Spanish central bank said that its banking sector requires only 15.15 billion euros ($21.4 billion) of fresh capital, independent assessments estimated the figure at 120 billion euros ($169.6 billion), Business Insider reported.

Investors are also concerned about the outcome on eurozone’s debt problems at the two-day summit of European Union (EU) leaders in Brussels, which begins on Thursday.

We think that no agreement at the EU summit on the bailout facilities should erode EUR support further in the near term,” Reuters reported, quoting Valentin Marinov, currency analyst at CitiFX.

Analysts said that relative interest rates remain as a significant support for EUR/USD trading.