Dollar falls, euro recovers as Italian political tensions ease

The euro was back under 1.1550 still under pressure.

Wednesday's development came as financial markets calmed after a rout a day earlier when investor concerns about Italy's finances gave the yield on Italian 2-year bonds its biggest rise since 1992 and dented the euro's exchange rate. The S&P 500 index 1.2 per cent to 2,689.86.

U.S. investment bank Goldman Sachs said today it had cut its euro/dollar forecast for the next 3, 6 and 12-months because of uncertainty stemming from Italy's political crisis, while HSBC said the dollar's recent rally had further to run.

European Union lawmakers from the two parties forming Italy's new government coalition backed this week a rejected proposal to set up EU funds to help countries quit the euro, a sign of the Italian leadership's ambivalent position on the common currency.

Although the FTSE started the day on a slightly higher note, 0.7% at 7,726.78, looking at the up and down bounce in the index this morning it is not at all clear that the upward trend will continue.

In another sign that investors were flocking to safer bets, the euro hit a 11-month low versus the yen and fresh 6-1/2 low against the Swiss franc Elsewhere in bonds, USA 10-year Treasury yields were at six-week lows at 2.883 per cent after a USA holiday on Monday. As panic eased, US 10-year bonds gave up some of their gains from Tuesday to send yields back toward 2.9%.

Italy's two anti-establishment parties - Five Star and The League - held last-minute talks aimed at forming a government yesterday, a move that would avoid repeat elections that could turn into a de-facto referendum on the country's euro membership. South Korea's Kospi dropped 2.0 per cent to 2,407.95.

Meanwhile, in the United Kingdom, The Sterling edged up by 0.08 percent against the Greenback on Thursday, to trade 1.32954 at the close. It fell to 74.99 yen from 75.61 yen yesterday. The greenback was little changed after its biggest decline in almost three weeks and the yen pushed higher. Hong Kong's Hang Seng index clawed back losses to gain 0.1 percent, ending at 30,492.91.

But the potentially more significant news was that core inflation - which excludes food, energy, alcohol and tobacco - that also increased to an eight-month high of 1.1 percent.

Asian markets were mostly lower, with traders keeping an eye on oil prices, which have tanked since Saudi Arabia and Russian Federation indicated they could lift output, having abided by a self-imposed cap for two years.

USA crude futures stood at $66.80 per barrel after falling for five sessions.

Brent crude futures edged up 0.3 per cent after dropping to $74.49 per barrel on Monday, their lowest in about three weeks.

  • Eleanor Harrison