US dollar strengthens after Fed comments

London

THE DOLLAR strengthened against other major currencies on Wednesday after a top US policymaker said that inflation expectations haven't gone up as much as he would have liked and he was comfortable with a December rate hike.

Federal Reserve policymaker Charles Evans's comments cut the euro's fledgling rally short after it was lifted earlier by reports that Italy plans to reduce its budget deficit over the next three years.

Mr Evans said getting US interest rates up to "a slightly restrictive setting" of 3.0 or 3.25 per cent would be consistent with the strong US economy and its inflation rate.

The greenback edged 0.05 per cent higher at 95.56 against its rivals and erased its losses against the euro which had gained in early London trading.

Uncertainty surrounding Italy's debt, fiscal plans and future ties with Europe have unnerved markets and exacerbated tensions with other eurozone leaders.

This has hit the euro, which on Tuesday slid to a six-week low after a senior lawmaker said that Italy should re-adopt a national currency, prompting a broad market sell-off .

The single currency regained some poise after a government source on Wednesday said Rome aims to gradually reduce its budget deficit to 2 per cent of gross domestic product in 2021.

"That the Italian government is trying to appease its EU partners can be seen as a step in the right direction and therefore justifies some euro-positive reaction," said Thu Lan Nguyen, a FX strategist at Commerzbank AG in Frankfurt.

"The devil is in the details. The euro's recovery will only continue if the new fiscal plans are also feasible," she said.

The euro was flat at US$1.15470 after rising 0.2 per cent at US$1.1561 in early trades. In the previous session, it fell to a low of US$1.1505, its lowest since Aug 21.

Other analysts are less sanguine about the euro.

"When was the last time you ever heard anybody question the integrity of any other G-8 currency?" said CMC Markets' chief analyst, Michael Hewson.

"The fact that politicians feel the need to constantly reiterate this line speaks to a fundamental weakness at the heart of the single-currency area," he said.

The yen and the Swiss franc, both safe-haven currencies, struggled against peers such as the euro, dollar and Australian dollar. REUTERS