Euro falls to lowest since late December on Italy debt worries

London

THE euro slumped to a five-month low on Wednesday after reports that a possible future Italian government would seek debt forgiveness from European creditors and as the dollar resumed its month-long and powerful rally.

The euro fell as much as half a per cent to US$1.1783, its lowest since late December, after reports surfaced that Italy's anti-establishment 5-Star Movement and far-right League plan to ask the ECB to forgive 250 billion euros (S$395 billion) of debt.

The single currency had initially shrugged off the news from Italy but with the dollar restarting its rally, the euro succumbed to selling pressures.

"This news from Italy has contributed to the weakening of the euro against the dollar," said Alvin Tan, an FX strategist at Societe Generale.

The euro also fell sharply against the safe-haven Swiss franc, to a five-week low of 1.1799 francs.

The euro had been a top performer in 2018, with traders betting on prolonged dollar weakness because of the US' trade and budget deficits and investors expecting to allocate more money to the eurozone as its economy strengthens.

Bets that the US Federal Reserve will in fact be an outlier in tightening monetary policy among major central banks and signs that the eurozone's economic recovery has peaked has unwound that entire euro strength and the currency is now down 1.8 per cent in 2018.

The single currency's decline on Wednesday was helped by a resurgent dollar, which hit a five-month high underpinned by gains in long-term US Treasury yields.

The dollar index versus a basket of six major peers rose 0.3 per cent to 93.517 after rallying to 93.457 overnight, its highest since Dec 22.

The US currency has gained since mid-April and clawed back its 2018 losses after a reassessment of the path of US monetary policy versus other countries.

Moves by China and the US to avoid a full-blown trade war have allowed investors to focus on the yield advantage the US enjoys over other countries.

The dollar rally stalled last week after weaker-than-expected April US inflation data but was lifted on Tuesday when strong US consumer spending numbers sent 10-year Treasury yields surging to a seven-year peak of 3.095 per cent.

The yen barely budged after data showed that Japan's economy contracted for the first time in nine quarters during the January-March period.

The Australian dollar was up 0.3 per cent at US$0.7491 after sliding 0.7 per cent overnight.

The pound was weaker at US$1.3471 after slipping to US$1.3452 on Tuesday, its lowest since December. REUTERS

READ MORE: US data fuelling greenback, but outlook lacks consensus