Euro rallies as Italy political crisis abates

London

THE euro rallied further on Thursday as Italian parties made last-ditch efforts to form a government and avert elections, going some way towards easing concerns about the impact of a political crisis there.

The rise of a potentially eurosceptic government in Italy and the impact that could have on the stability of Europe has seen the euro fall 3.5 per cent this month as the dollar has bounced back.

A degree of calm, however, has returned with two anti-establishment parties renewing efforts to form a viable coalition.

The euro climbed half a per cent to a three-day high of US$1.1725 on Thursday, having risen 1.1 per cent the previous day, its second-biggest daily gain this year. It hit a 10-month low of US$1.1510 on Tuesday.

The rally followed remarks by Italian Prime Minister-designate Carlo Cottarelli on Wednesday that possibilities had emerged "for the birth of a political government", suggesting that politicians, rather than technocrats like himself, might be able to steer the country out of deadlock.

That has eased fears of a snap election that some say would effectively be a referendum on Italy's euro membership.

"There's some calm now and the US$1.15 level looks like a trough for the euro for the time being," said Commerzbank analyst Thu Lan Nguyen.

"But the markets are likely to remain in thrall to the political crisis in Italy. Euro investors should therefore remain vigilant," she said.

Others also remained cautious.

"As the Italian bond spreads have shrunk, the euro is being bought back. But the situation still looks murky and it is far from certain whether the euro's recovery becomes full-fledged," said Naoya Oshikubo, strategist at Barclays.

The euro is set for its biggest monthly drop in over a year and a half, according to Thomson Reuters data. An underlying theme that has pushed the euro lower since mid-April is an economic slowdown in Europe and the subsequent retreat in expectations for an early rate hike from the European Central Bank.

Weaker-than-expected economic data from eurozone has raised questions about whether the ECB will, as expected, wind down its 2.55 trillion (S$3.9 trillion)-euro stimulus programme by the end of this year and raise interest rates towards the middle of next year.

Eurozone inflation jumped far more than expected in May on higher energy costs, data showed on Thursday, bringing some relief to the ECB but having a minimal impact on the euro. REUTERS