Euro rally fades despite easing Italian woes, Brexit deal hopes

London

THE euro's bounce fizzled on Tuesday as a broad dip in investor appetite for risk dragged the single currency lower, offsetting recent positive sentiment towards Italian government debt before a central bank meeting later this week.

Broader moves in forex markets were contained, with investors fretting about the next developments in the continuing trade dispute between China and the United States.

Sterling was the big mover, rallying to a five-week high above US$1.30 after the European Union chief negotiator signalled somewhat improved prospects of a Brexit deal.

The euro was buoyed by a fall in Italian government borrowing costs after Economy Minister Giovanni Tria on Monday predicted that yields would drop as the government lays out its eagerly awaited 2019 budget.

The single currency initially rose 0.4 per cent to US$1.1644 , building on Monday's advance before erasing those gains to trade down 0.1 per cent at US$1.1584.

The dollar index rose 0.1 per cent to 95.228. "This seems to be some sort of broad risk-off mood. It's nothing particular for the euro," said Societe Generale analyst Alvin Tan. He does not expect there to be much impact on the single currency from the European Central Bank's policy meeting on Thursday. "If the Italian (government bond yield) spreads narrow further that's going to be the bigger driver of the euro," he said.

Analysts say there needs to be some clarity about the US-China trade dispute before the world's most traded currency pair can find fresh direction. "Euro/dollar has come to a bit of a standstill," said Neil Mellor, a strategist at BNY Mellon.

Markets remain nervous - Asian and European stocks fell on Tuesday - about any US move to slap fresh duties on Chinese goods and after further falls in emerging markets. Reports on Monday that Michel Barnier, the EU's top negotiator, told a forum in Slovenia that it was "realistic" to expect a Brexit deal in six to eight weeks helped the pound to its highest level since Aug 2. It built on those gains on Tuesday, rising to as high as US$1.3087, before falling back. Mr Barnier's comments were seized on by markets as a signal that Britain could avoid a disorderly no-deal Brexit.

News that Japanese chipmaker Renesas was buying US counterpart Integrated Device Technology for about US$6.7 billion in cash weighed on Japan's currency, which was down 0.3 per cent at 111.41 against the dollar.

The Australian dollar fell below US$0.71 to its lowest since February 2016 on concerns that potential damage to the Chinese economy from a trade war would also hit Australia's vast export industries. The Australian currency later recovered slightly to trade down 0.2 per cent at US$0.7104. REUTERS