The euro fell while Bund futures jumped on Tuesday as ratings firm Moody's cut Portugal's rating to A1 with a stable outlook.
The euro fell around 40 ticks against the dollar to the day's low of $1.2523, while it also hit a session low against the pound at 83.51 pence.
The downgrade is going to weigh on the euro in the short-term and doesn't bode well ahead of the bank stress tests due next Week, said David Tinsley, economist at National Australia Bank.
Bund futures erased losses, rising to a session high of 129.47, up 13 ticks on the day.
The Portuguese/German 10-year yield spread widened to 290 basis points, around 4 basis points wider versus Monday's settlement.
The cost of protecting Portuguese government debt against default also rose. The five-year credit default swap climbed to 286 basis points from 279.5 bps at the New York close on Monday, according to monitor CMA DataVision.
Portugal's PSI 20 <.PSI20> index fell 0.3 percent, while Europe's FTSEurofirst 300 <.FTEU3> pared gains, but still traded up 0.5 percent at 1,030.68 points.
(Reporting by London markets team)