Euro recovers as Italy tries to address investor concerns

The euro climbed from a six-and-a-half month low against the dollar on Monday

epa06767543 Italian President Sergio Mattarella addresses the media after meeting Italy's premier-designate Giuseppe Conte, Rome, 27 May 2018. Italian President Sergio Mattarella said he refused to approve populist leaders' choice of an economy minister - namely Paolo Savona - who has expressed anti-euro views because the appointment would have 'alarmed markets and investors, Italians and foreigners.' Mattarella spoke to reporters after Premier-Designate Giuseppe Conte, who was proposed as Prime Minister by Right-wing populist Lega and the populist Five Star Movement (M5S), announced that he did not succeed in forming what would have been Western Europe's first populist government.
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The euro crawled off a six-and-a-half month low against the dollar on Monday, catching its breath after Italy’s president tried to allay investor worries about political unrest in the country, although the prospect of a near-term election capped gains.

The euro was 0.45 per cent higher at $1.1703 after falling on Friday to $1.1646, its lowest since mid-November, losing more than 1 per cent on the week.

The common currency was up 0.45 per cent at 128.065 yen after sinking on Friday to an 11-month low of 127.165.

The euro was seen to have received a mild lift after Italian President Sergio Mattarella on Sunday rejected Paolo Savona, a vocal critic of the single currency, as the economy minister. The two populist parties attempting to form a coalition in Italy had pushed for Savona to be appointed to the pivotal role.

But the euro’s bounce was limited as an early election in Italy looked inevitable as the far-right League and anti-establishment 5-Star Movement abandoned plans to forge an alliance after their choice of economy minister was vetoed.


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“The League and 5-Star Movement parties could expand their influence even further if a re-election is called, and Italian politics will remain unstable,” said Masafumi Yamamoto, chief forex strategist at Mizuho Securities in Tokyo.

“The euro zone also faces low inflation and slowing growth, limiting the euro’s rise and leaving it vulnerable to fresh downside risks.”

Adding to the unrest in Europe, Spain’s prime minister, Mariano Rajoy, was threatened with no-confidence motions and demands for a snap election.

“The euro has managed to bounce, going through a bit of a consolidation. But fundamentally, it is still a ‘sell’ for the currency,” said Junichi Ishikawa, senior FX strategist at IG Securities in Tokyo.

“Euro zone economic fundamentals are the trunk and the region’s political woes are the protruding branches, and both are facing headwinds right now.”

Data last week showed German PMI data fell to a 20-month low in May indicating that economic momentum in Europe’s biggest economy was faltering and European Central Bank minutes of its April meeting showed policymakers were worried about a more pronounced slowdown in the eurozone and political uncertainty in Italy.

The dollar index against a basket of six major currencies dipped 0.2 per cent to 93.988 after rising to 94.248 on Friday, its highest since Nov. 14.

The greenback was up 0.05 per cent at 109.400 yen after going as high as 109.830 on a slight ebb in risk aversion after US President Donald Trump said on Sunday a US team had arrived in North Korea to prepare for a proposed summit between him and North Korean leader Kim Jong Un.

Trump had initially pulled out of the summit last week, which had sapped broader investor risk appetite and helped push the dollar to a two-week trough of 108.955 yen on Thursday.

The Australian dollar, which is sensitive to shifts in risk sentiment, gained 0.25 per cent to $0.7569 after shedding 0.4 per cent on Friday. The New Zealand dollar advanced 0.4 per cent to $0.6945 after losing 0.2 per cent on Friday.

The Canadian dollar extended Friday's losses to touch C$1.2992 per dollar, its weakest since May 8. It had retreated roughly 0.8 per cent on Friday as crude prices tumbled.