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Euro falls towards 5-month lows on US bond yield rise

London

THE euro fell towards a five-month low on Thursday as investors fretted about the demands of populist parties likely to form Italy's next government and as a fresh rise in US Treasury bond yields underpinned demand for the dollar.

The euro has slumped six cents from more than US$1.24 in the space of three weeks after a huge dollar rally. Investors are betting that US interest rates will need to rise further to curb inflation while other central banks are postponing monetary tightening.

That has forced investors who took big positions against the dollar anticipating it would fall in 2018 to rush to unwind and cover their positions, pushing the greenback even higher.

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Some analysts say the market remains complacent about the possibility of a rising dollar, which also notched up a four-month high against the Japanese yen on Thursday as 10-year Treasury yields approached their highest since 2011. The euro slid 0.2 per cent to US$1.1787, slightly above the US$1.1763 2018 low it hit on Wednesday.

The euro is also suffering from reports that Italy's anti-establishment 5-Star Movement and the anti-immigrant League, which are working to draft a coalition programme, may ask the European Central Bank to forgive 250 billion euros of debt.

But broader Italian markets held up better on Thursday as investors played down the broader impact on eurozone political stability and questioned whether the Italian parties would really follow through on such plans.

"The sheer outlandishness of some leaked plans helped ease investor concerns a bit. The would-be coalition's denials that leaked draft policies were ever concrete plans also helped smooth markets," said Ken Odeluga, an analyst at City Index.

Sterling gave up earlier gains after the UK government dismissed a media report that Britain wanted to stay in the European Union's customs union after Brexit.

The dollar rose to its strongest versus the Japanese yen since Jan 23, up 0.3 per cent on the day at 110.70 yen.

The Australian dollar added 0.1 per cent to US$0.7524 after gaining 0.6 per cent overnight, buoyed by a rise in prices of commodities such as copper. Other commodity-linked currencies like the Canadian dollar also advanced.

Volatile emerging market currencies, the biggest losers from the dollar's recovery, took another beating.

Rising Treasury yields have enhanced the dollar's appeal and raised global borrowing costs. For emerging markets with current account deficits that means higher costs and the risk of fund outflows and their currencies declining further, analysts say.

The Indonesian rupiah recovered from its weakest since October 2015 after the central bank raised its interest rate for the first time since 2015 to boost the fragile currency. REUTERS