* Euro falls as euphoria over ECB bond buying fades
* Dollar falls versus Swiss franc, yen after S&P downgrade
* Markets on alert for intervention by Japan, Switzerland (Updates prices, adds comment, details, changes byline, dateline, previous LONDON)
By Wanfeng Zhou
NEW YORK, Aug 8 (Reuters) - The euro fell on Monday on fears the European Central Bank's buying of Spanish and Italian debt would not stem the spreading debt crisis, while the dollar dropped against the Swiss franc and yen after the U.S. debt rating cut.
Traders said the ECB bought Spanish and Italian debt early in the European session after it said on Sunday it would "actively implement" its bond-buying program. That helped lift the euro to a high above $1.44 earlier. See [ID:nL6E7J704K]
But the ECB purchases did little to alleviate concerns that the euro zone's debt crisis is spreading to core countries. Nervousness in global financial markets after Standard & Poor's cut the United States's AAA sovereign rating on Friday also prompted investors to shed risk and pressured the euro.
"The complete unwind of the euro/dollar rally before the open of North American trade speaks volumes about the currency market's fear of the euro zone credit crisis," said Boris Schlossberg, director of currency research at GFT in New York.
"Today's price action is shaping up as a battle of confidence between central banks and the bond vigilantes which continue to press the credit markets in Spain, Italy and perhaps France next," he added.
Five-year credit default swaps on French government debt rose 15.5 basis points to 160 basis points -- a record high -- according to data monitor Markit. This means it costs 160,000 euros to protect 10 million euros of exposure to French bonds.
The euro
The euro fell 1.2 percent against the safe-haven Swiss franc
Trading in the euro remained volatile, with one-month euro/dollar implied vol
RISK AVERSION
The dollar
Wall Street stocks tumbled after the U.S. debt downgrade rattled investors already nervous a global economic slump. Gold hit a new record high above $1,700 an ounce.
The world's industrial powers pledged on Sunday to take whatever actions were needed to steady financial markets.
"The perception in markets is increasingly that central banks do not have the tools to solve the problems the advanced economies face and that worse the response to date might have caused more harm than good," said Camilla Sutton, senior currency strategist at Scotia Capital in Toronto.
Some analysts said the S&P downgrade highlighted the view that the dollar will remain weak and that they saw room for the U.S. currency to depreciate more than the euro versus a range of currencies.
"Our hunch is that the external pressure on the euro is a lot less than the external pressures on the dollar," said Thomas Stolper, currency strategist at Goldman Sachs.
"As soon as there is a loss of confidence (in the U.S.), foreigners stop buying U.S. assets. It's also the same as in Europe, but the U.S. has a large current account deficit to fund, whereas Europe doesn't."
Goldman held its euro/dollar forecast at $1.45 for the next three months, while it expects the pair to hit $1.50 in six months. It lowered its three-month dollar/yen forecast to 77 yen from 82, and sees the dollar falling to 74 yen in a year.
Demand for the franc and the yen kept alive the threat of intervention by Swiss and Japanese authorities to weaken their currencies, whose strength eats into their exports.
Market participants expect Japanese authorities will re-enter the market if the dollar falls to 77.10 yen -- the level at which it sold yen for dollars last week. (Additional reporting by Naomi Tajitsu in London; Editing by Chizu Nomiyama)