EUR/USD rallied Monday as U.S. assets were shunned after ratings agency Moody's cut the U.S credit rating but a massive rally for the euro might not be on the cards.

U.S. yields had been rising well ahead of Moody's action as investor concerns about fiscal spending and inflation were already a factor. Yields increased after the ratings cut but the greatest impact occurred in the longer-end of the curve

while yields on the shorter end of the curve are not spiking higher.

Foreign bond yields had also been increasing ahead of Moody's on higher probabilities foreign governments would have to increase borrowing to fund spending directed at stimulating growth.

Investors appear to have not been overly surprised by the Moody's downgrade and may be focused more on shorter-dated yields, which have a greater influence on EUR/USD.

The dollar's yield advantage over the euro increased Monday. German-U.S. 2-year yield spreads which EUR/USD is correlated with, traded their widest since April 11. Terminal rate spreads for the Fed and ECB widened out to -165bps from -163bps at the end of last week. Those wider spreads likely helped limited EUR/USD's upside Monday.

Once the dust from the Moody's move settles EUR/USD may come under some bearish pressure if spreads continue to move in the dollar's favor.
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(Christopher Romano is a Reuters market analyst. The views expressed are his own)