CURRENCIES

Euro plunges as risk aversion, Italy concerns weigh

London

THE euro fell to near three-month lows against the Swiss franc on Wednesday as fresh data indicating a slowdown in European business activity cast a shadow over the timing of the central bank's rate hike, while concerns over Italian politics rose.

The euro's weakness also spilled over to the US dollar, falling half a percent on the day, but broader risk aversion kept the greenback on the back foot against the franc and the yen. The yen surged 1.2 per cent against the US dollar, set for its biggest daily rise in more than a year, as a wave of caution swept currency markets a day after US President Donald Trump tempered optimism over progress made in trade talks with China.

Carry trades, where investors borrow in relatively low yielding currencies to invest in higher-yielding ones, came under pressure with the euro/Swiss franc falling to its lowest levels since early-March. The euro has unwound all of its rally against the franc since the Italian elections as the prospect of a spendthrift coalition government taking shape in Rome unnerved investors.

While the US dollar against a basket of its rivals rose 0.4 per cent to 94.00, it weakened 1.2 per cent and 0.6 per cent against the yen and Swiss franc respectively. Stocks tumbled and the yen gained broadly after Mr Trump said on Tuesday he was not pleased with recent trade talks between the United States and China, the world's two biggest economies.

The euro fell to a six-month low after German PMI data fell to a 20-month low indicating that economic momentum in Europe's biggest economy was faltering. The euro/Swiss franc fell 0.7 per cent to 1.1601 francs per euro, its lowest level since March 6. The currency pair, a proxy for risk appetite within Europe, has fallen nearly 3 per cent since May 14 as concerns of a fiscally profligate new coalition government in Rome has raised concerns of a showdown with the European Union.

The likelihood of a government comprised of the anti-establishment 5-Star Movement and the far-right League has pushed Italian 10-year yields up nearly 60 basis points since the start of May. The bulk of that move has been over the past week.

The safe-haven yen also rose against other currency crosses and surged against the Turkish lira, amid talk of Japanese retail investors selling the lira as stop-loss levels were hit. Investors were looking to the release on Wednesday of the Fed's minutes from its most recent meeting, when it kept interest rates steady. REUTERS

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