The European Single Currency, euro, rallied further on Thursday, May 31, as Italian parties made last-ditch efforts to form a government and avert elections, going some way towards easing concerns about the impact of a political crisis there.
The euro climbed half a percent to a three-day high of $1.1725 on Thursday, having risen 1.1 percent the previous day, its second-biggest daily gain this year. It hit a 10-month low of $1.1510 on Tuesday.
The rise of a potentially eurosceptic government in Italy and the impact that could have on the stability of Europe has seen the euro fall 3.5 percent this month as the dollar has bounced back.
A degree of calm, however, has returned with two anti-establishment parties renewing efforts to form a viable coalition.
The rally followed remarks by Italian Prime Minister-designate Carlo Cottarelli on Wednesday that possibilities had emerged “for the birth of a political government,” suggesting politicians, rather than technocrats like himself, might be able to steer the country out of deadlock.
That has eased fears of a snap election that some say would effectively be a referendum on Italy’s euro membership.
“There’s some calm now and the $1.15 level looks like a trough for the euro for the time being,” said Commerzbank analyst Thu Lan Nguyen.
“But the markets are likely to remain in thrall to the political crisis in Italy. Euro investors should therefore remain vigilant,” she said.
The euro is set for its biggest monthly drop in over a year and a half, according to Thomson Reuters data.
An underlying theme that has pushed the euro lower since mid-April is an economic slowdown in Europe and the subsequent retreat in expectations for an early rate hike from the European Central Bank.
Weaker-than-expected economic data from euro zone has raised questions about whether the ECB will, as expected, wind down its 2.55 trillion-euro stimulus program by the end of this year and raise interest rates towards the middle of next year.
Euro zone inflation jumped far more than expected in May on higher energy costs, data showed on Thursday, bringing some relief to the ECB but having a minimal impact on the euro.
The calmer mood around Italy helped to knock the yen off its five-week high hit on Tuesday, but many investors are also wary of a potential escalation in trade frictions.
Sources said the United States will announce plans to impose tariffs on steel and aluminum imported from the European Union.
The dollar shed 0.3 percent to 108.60 yen JPY= on Thursday morning, edging back towards Tuesday’s five-week low of 108.115 yen.
