Euro wilts before EU decision on Italy budget

October 23, 2018

By Tom Finn

LONDON (Reuters) – The euro fell toward a two-month low on Tuesday before a meeting by the European Commission on Italy’s budget that could see Brussels take the unprecedented step of rejecting it and demanding changes.

A dispute over Italy’s spending plans and doubts about the leadership of Britain’s prime minister, mired in a stalemate over Brexit, means investors are focusing on the likelihood of further political turmoil in Europe.

That contributed to broad risk aversion on Tuesday, with the safe-haven Japanese yen and Swiss franc strengthening while higher-yielding currencies like the Australian and New Zealand dollars fell.

Worries about Italy’s spending has bred some doubt about the European Central Bank’s plan to raise interest rates next summer and that has hurt the euro. On Tuesday, it fell 0.2 percent to $1.4390, nearing a two-month low of $1.4325 hit on Oct. 9. (EUR=EBS)

Italy’s bond yields ticked up on Tuesday before the meeting. Mario Centeno, the head of the Eurogroup of eurozone finance ministers, said on Monday he was confident an agreement could be reached.

“The prospect of a normalization of monetary policy was the main reason why the euro was able to appreciate over the past year. However, there is a rising risk that this support is now going to crumble,” Commerzbank (DE:CBKG) analyst Thu Lan Nguyen said.