The European Single Currency, euro slumped to a five-month low on Wednesday, May 16, after reports that a possible future Italian government would seek debt forgiveness from European creditors and as the dollar resumed its month-long and powerful rally.
The euro fell as much as half a percent to $1.1783 EUR=, its lowest since late December, after reports surfaced that Italy’s anti-establishment 5-Star Movement and far-right League plan to ask the ECB to forgive 250 billion euros of debt.
The single currency had initially shrugged off the news from Italy but with the dollar restarting its rally, the euro succumbed to selling pressures.
“This news from Italy has contributed to the weakening of the euro against the dollar,” said Alvin Tan, an FX strategist at Societe Generale.
“Once an Italian government is formed the market will be keen to know the details of the fiscal policy. Are they really going to push for this write-off from the ECB? That’s the one big question mark,” he said.
The euro also fell sharply against the safe-haven Swiss franc, to a five-week low of 1.1799 francs. EURCHF=EBS
The euro had been a top performer in 2018, with traders betting on prolonged dollar weakness because of the United States’ trade and budget deficits and investors expecting to allocate more money to the euro zone as its economy strengthens.
Bets that the Federal Reserve will in fact be an outlier in tightening monetary policy among major central banks and signs the euro zone’s economy recovery has peaked has unwound that entire euro strength and the currency is now down 1.8 percent in 2018.
The single currency’s decline on Wednesday was helped by a resurgent dollar, which hit a five-month high underpinned by gains in long-term U.S. Treasury yields.
The dollar index versus a basket of six major peers rose 0.3 percent to 93.517 .DXY after rallying to 93.457 overnight, its highest since Dec. 22.
