Euro bounces off 10-month lows

London

THE euro recovered on Wednesday from 10-month lows after reports that Italy's biggest party would make a renewed attempt to form a coalition government and end months of political turmoil.

An attempt by two anti-establishment parties to form a new government in Italy collapsed at the weekend, raising the prospect of an early election. Markets feared that election would become a de facto referendum on Italy's use of the euro.

A source close to 5-Star, the single largest party in the new parliament, said the party would try again to form a coalition with the right-wing League. Without a deal, sources said President Sergio Mattarella could dissolve parliament in the coming days and send Italians back to the polls as early as July 29.

The euro rallied and Italian government bond yields settled below multi-year highs after Tuesday's market slide. A smooth auction of Italian government debt also helped soothe market jitters.

The single currency, which plunged to a 10-month low of US$1.1510 on Tuesday, rose as much as 0.7 per cent to US$1.1624 on Wednesday. It remains down 4 per cent this month against the dollar.

Analysts said the euro was still at risk of falling.

"The risk to the euro is predominantly political in the near term ... We are confident that the euro is capped," said Alvin Tan, an FX strategist at Societe Generale. The bank doubts the euro can rise much above US$1.15 or US$1.16 until the Italian crisis is resolved, he said.

After major moves on Tuesday, foreign exchange markets traded on a quieter note.

The euro had dropped one per cent against the safe-haven Swiss franc on Tuesday in its biggest daily fall since September, but it recovered 0.6 per cent to 1.1508 francs.

Against the yen, the euro rose to 126.285 yen after hitting an 11-month low of 124.62 yen overnight, down from about 131 yen last week.

The Swedish crown, a big loser in recent weeks, recovered against the dollar after Tuesday's drop. It also gained against the euro.

The dollar index, measured against a basket of currencies, slipped 0.4 per cent to 94.442 and below Tuesday's 6½- month high. The dollar remained steady against the yen.

Signs of a possible escalation in trade frictions between the United States and China continued to worry investors, after the White House said that it could still impose tariffs on US$50 billion of imports from China. REUTERS