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Euro set for fifth week of decline as Italy concerns weigh

posted onMay 18, 2018
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The euro is set on Friday for its fifth successive weekly decline versus the dollar, in what would be a first for the currency since 2015, as investors continue to keep a close eye on the political situation in Italy, euro zone’s third-largest economy.  

The shared currency 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 anti-establishment parties likely to form Italy’s next government.

The Mediterranean country, a founding member of the EU and the euro, looks set to finally get a collation government, two months after the general election delivered a political stalemate.Two major forces emerged at the polls: a right-wing coalition led by euroskeptic, anti-migrant League party which garnered 37 percent of the vote, and the anti-establishment Five Star Movement (M5S), the biggest single party with just under 33 percent. 

On Thursday, M5S head Luigi Di Maio and League leader Matteo Salvini agreed the basis for a governing programme that would cut taxes, increase welfare payments for the poor and scrap an unpopular pension reform. 

Experts have estimated that the measures in the programme could cost over 100 billion euros while critics have said the programme does not give sufficient information about the financial coverage for these measures.

Ratings agency DBRS warned that the economic proposals of the parties could threaten Italy’s sovereign credit rating according to Reuters.

“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,” David Madden, a strategist at CMC Markets told the news agency.

News of the Italian proposals caused concern also in Brussels, where European Commission Vice President Valdis Dombrovskis reiterated on Thursday that the new Italian government will be expected to comply with the EU's budget rules.

 "I don't comment in the policies of parties or the processes of forming governments, but what I emphasize is that, in any case, it is important to abide by budget discipline and, especially for Italy, to continue reduce the deficit and debt because these are risk factors," Dombrovskis told the European Parliament.

The euro on Friday inched up 0.2 percent to $1.1814 but has fallen nearly 1.2 percent this week. On Wednesday dropped to a five-month low of $1.1763. A powerful rally by the U.S. dollar is also hurting the shared currency.

The greenback on Friday rose against a basket of major currencies, encouraged by a further rise in U.S. Treasury yields.  The 10-year Treasury yield hit another seven-year high on Thursday at 3.128 percent, after earlier touching its highest level since August 2008.  he recent climb in yields comes amid a flood of economic data this week.  US initial jobless claims were up 11,000 and reached 222,000, the Labour Department said on Thursday. However, the U.S. labour market is approaching full employment with the jobless rate near a 17-year low of 3.9 percent.  

The dollar, which has risen 5 percent since mid-February, touched a high of 111.005 yen on Friday, its strongest level since Jan. 23 according to Reuters. Most emerging market currencies continued to wilt against the surging dollar. The Indonesian rupiah declined to a two and a half year low despite the country's central bank raising interest rates on Thursday.