The euro edged down and defensive stocks rose on Monday as European policymakers prepared for talks on enhancing the IMF's arsenal and tightening euro zone fiscal rules, while the death of North Korean leader Kim Jong-il fed fears of instability in Asia.
The single currency also slipped after Fitch's warning late Friday that it could downgrade France and six other euro zone countries as it believes that a comprehensive solution to the region's debt crisis is "technically and politically beyond reach".
"The market can to some extent deal with a lower growth profile but what it cannot manage is the ongoing policy paralysis in the euro zone," said Gavin Friend, currency strategist at NAB Capital.
"I can't see any euro rallies lasting for long," he added.
The euro was down about 0.2 percent at $1.3013 versus the dollar after falling to an 11-month low last week of $1.2945. The dollar index <.DXY> was flat for the day at 80.234, paring gains made in the Asian session.
European shares rose on demand for defensive stocks as the Fitch warning about possible credit downgrades, worries about global growth, and the death of the North Korean leader combined to turn investors away from riskier cyclical sectors.
The defensive STOXX Europe 600 Food & Beverage index <.SX3P> sector was the main outperformer in Europe, while more cyclical oil stocks, whose performance is correlated to economic growth, were the worst performers. The STOXX Europe 600 Basic Resources index <.SXPP> fell 0.5 percent.
MSCI's world equity index <.MIWD00000PUS> was down around 0.35 percent.
EU ministers are set to discuss the draft text of a new euro zone "fiscal compact" in a teleconference so that it can be finalized by the end of January. The meeting comes after a key summit earlier this month failed to produce a convincing plan to solve the region's funding problems.
The finance ministers also face a deadline on Monday to decide their contributions to a plan to extend up to 200 billion euros in bilateral loans to the IMF to bolster its crisis-fighting power.
Doubts hang over the scheme after Germany's Bundesbank said last week it would only contribute if non-euro zone and non-European countries did too, while the level of outside commitment is also not clear.
German government bonds were steady early on Monday, supported by some safe-haven buying linked to the death of the North Korean leader and the ratings agency warnings.
While credit downgrades are anticipated, trade is expected to thin out ahead of the Christmas holidays.
Elsewhere benchmark 10-year Belgian bond yields rose 9 basis points to 4.42 percent and the yield spread to equivalent German bonds also widened after Moody's Investors Service cut Belgium's credit rating by two notches to Aa3 late on Friday.
NORTH KOREAN RISK
North Korea's announcement on Monday that its leader Kim Jong-il died of a heart attack while on a train trip on Saturday sparked immediate concern over who is in control of the reclusive state and its nuclear program.
Kim Jong-un, Kim's youngest son, was named by North Korea's official news agency KCNA as the "great successor".
The news prompted a sharp fall in South Korean stocks, where the benchmark index closed at a three-week low, down 3.4 percent<.KS11>.
"Geopolitical risks have been quite high this year ... and this (the North Korean leader's death) adds to a global environment of rising risks so it's not good news," said Thomas Costerg, European Economist at Standard Chartered Bank.