Euro continues to fall as Italy agrees on a government

The anti-establishment 5-Star Movement and far-right League on Friday published their joint government programme, promising a major spending spree that will likely put Italy on a collision course with the European Union.

If they receive the backing of their supporters in swift, informal ballots planned over the next three days, the coalition government could take office as early as next week, ending 11 weeks of political paralysis.

However, the two parties have yet to announce who they want to put forward as prime minister and still need the blessing of president Sergio Mattarella.

The euro was headed for its fifth successive weekly decline versus the dollar, in what would be a first for the currency since 2015, as the political uncertainty in Italy continued to worry investors.

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The euro has slumped six cents from more than $1.24 in the space of three weeks after a huge dollar rally and amid concerns about the demands of populist parties likely to form Italy’s next government.

Ratings agency DBRS warned that the economic proposals of the anti-establishment parties could threaten Italy’s sovereign credit rating.

The euro on Friday inched up 0.2 per cent to $1.1814. But the currency has fallen nearly 1.2 per cent this week and on Wednesday dropped to a five-month low of $1.1763.

“The possibility of a eurosceptic government in Rome is shaking investor confidence ... at this point a larger fiscal deficit and greater bond issuance [IN ITALY]does seem likely,” said David Madden, a strategist at CMC Markets.

A founding member of the EU and the euro, Italy accounts for 15.4 per cent of Eurozone GDP and the parties’ hostility toward the European Union stance is the biggest challenge to the bloc since Britain voted to leave two years ago.

Still, some investors have played down the broader impact on the euro and questioned whether the Italian parties will really follow through on such plans.

A powerful rally by the dollar is also hurting the euro.

On Friday the greenback edged higher against the yen and set a fresh four-month high, buoyed by a further rise in US Treasury yields that suggests a an upbeat outlook for the world’s largest economy.

The dollar, which has risen 5 per cent since mid-February, touched a high of 111.005 yen on Friday, its strongest level since January 23rd.

“Moves in US yields remain the focus. If they rise further the dollar could strengthen on the back of that and pull the dollar higher against the yen,” said Shinichiro Kadota, senior strategist at Barclays in Tokyo.

Investors are betting that US interest rates will need to rise further to curb inflation.

That has forced investors who took big positions against the dollar anticipating it would fall in 2018 to rush to unwind and cover their positions, pushing the greenback even higher.

In a note to clients, strategists at Citibank said the current rally in the dollar would not last long.

The US budget deficit, which is projected to balloon to more than $1 trillion in 2019, they said, would contribute to a drop of 5 per cent in the dollar index over the next 12 months.

Most emerging market currencies continued to wilt against the surging dollar.

The Indonesian rupiah weakened half a per cent to 14,115, its lowest in more than 2-1/2 years and shrugging off a rate rise by the central bank late on Thursday. – Reuters