Euro falls on reports of delayed Italian budget meet

London

THE euro fell on Thursday on media reports that an Italian budget meeting was likely to be delayed, spooking traders concerned that the ruling parties will push for a bigger deficit target in the eurozone's third-largest economy. Political wrangling over the budget in heavily indebted Italy has overshadowed a recent revival in the euro's fortunes against the US dollar.

Italian daily La Stampa said that Economy Minister Giovanni Tria "was ready to leave" before a spokeswoman for the ministry denied that the minister planned to quit.

Market analysts attributed the euro's drop to a report by the Corriere della Serra that the budget meeting scheduled for 1600 GMT was likely to be delayed.

Prime Minister Giuseppe Conte's office denied that the cabinet meeting would be delayed but with Italy's new government struggling to contain the battle over fiscal policy, investors dumped the euro.

The currency fell half a per cent to as low as US$1.1685, its weakest since Sept 20, before recovering somewhat to trade at US$1.1710.

"There is concern the parties will push for a bigger deficit target," said Alvin Tan, an FX strategist at Societe Generale.

He said that Mr Tria's reported willingness to accept a deficit target of 2 per cent of economic output would be the "threshold" at which the market would judge new proposals.

Thanks to the euro's decline, the US dollar added to its modest overnight gains following the Federal Reserve's interest rate hike. The US dollar index rose 0.4 per cent to 94.522.

The index had scaled a 13-month high in mid-August, drawing safe-haven demand as trade-related tensions buffeted riskier currencies. The index has since fallen about 2.8 per cent as investors become less concerned about the US-China trade conflict impacting global growth.

The US Federal Reserve, as expected, raised rates for the third time in 2018. The central bank still foresees another rate hike in December, three more next year, and one increase in 2020.

It also dropped a reference in its statement to the word "accommodative", although Fed chairman Jerome Powell later said that policy was still accommodative.

Long-term US Treasury yields declined following the Fed's tightening, pulling back from four-month highs of 3.11 per cent scaled earlier in the week, with some investors thought to have wagered that the Fed would hint at faster monetary tightening. REUTERS