Euro Falls as Italian Yields Rise on Rome-EU Budget Conflict

The euro posted losses on Monday as investors absorbed the latest spike in Italian bond yields caused by the conflict between Rome and the European Union over Italy’s budget plans.

Against the dollar, the euro dropped 0.4 percent to 1.1475, nearing its more than one-year low of 1.1355 booked in August.

The dispute weighed on the EUR/CHF pair, as it hits its biggest loss since September. The euro last stood 0.3 percent lower to 1.1399 against the Swiss franc.

The currency was down 0.8 percent to 129.82 against the yen.

The euro has been quite unyielding to such increases in recent weeks as concerns over Italy’s budget have dominated headlines.

However, with the weakness in global stock markets and widening gap between key European and US bond yields combined, investors who had expected a fourth quarter euro recovery decided to dump the currency.

Head of macro strategy Timothy Graf stated that the Italian situation is an excuse for some investors who had been anticipating a rebound in the past few weeks of the year as recent data out of Europe has hardly been supportive.

Italian politics continued to be a drag as the European Commission cautioned that the country’s budget deficit breached past commitments, resulting to Rome to maintain its stance of not retreating from its spending plans.

Aggravating market concerns, Italian Deputy Prime Minister Matteo Salvini described European Commission President Jean-Claude Juncker and Economics Commissioner Pierre Moscovici as enemies of Europe.

Struggling European economic data, particularly on the inflation segment, has shown significant difference from the data of the US in recent weeks, urging hedge funds to gradually reduce their long positions on the euro to their lowest for almost 1-1/2 years.

US Dollar Rises for the Second Consecutive Week

The dollar rose against a basket of its peers on Monday, driven by weakness in stock markets worldwide, led by Chinese stocks, and recent positive US data.

Translating the euro’s weakness into strength, the US dollar index, which measures the greenback’s strength against a basket of major currencies, was up 0.2 percent to $95.59 and closing in on the 14-month high of 96.991 reached in August.

FX strategist Manuel Oliveri said the dollar has been supported by some strong data, but with the market already long dollars at these levels, new data has to surprise investors by a bigger margin to push it higher.

The currency gained half a percent in the previous week, marking its two-week run of gains as hedge funds raised their dollar holdings by $3.4 billion to $28.7 billion last week, the largest since December 2016, according to latest figures.

With Japan on holiday and the US bond market on a break, the lack of liquidity has put a cap on movements. The unexpected and sharp rise in Treasury yields had underpinned the dollar for most of last week.

The 10-year Treasury yield hit a seven-year peak on Friday, after the US saw unemployment rate declined to its lowest since 1969.

Investors are anticipating the US CPI data which is set to be release on Thursday. Markets forecast a 0.2 percent rise on a monthly basis in September, retaining last month’s estimate and larger increase will strengthen US rate hike expectations in 2019.

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