You have to play with the parameters a little more.
Precision defines the maximum deviation allowed between the input and the output.
Preserve Shared Boundaries is used on area features only.
My favorite transformer for generalizing contour lines is the Generalizer set to NURBfit, so try this one to.
Also, by the looks of it, your contours were overlaping before the CorveFitter.
@aron CurveFitter doesn't have a constraint algorithm to prevent overlaps. As @caracadrian suggests, you can try tweaking the (many) CurveFitter parameters.
You could try the SherbendGeneralizer. It doesn't fit curves but it will generalize your contours preserving the spatial relationships. Perhaps a combination of the two will give you the results you need.