May 31, 2018 / 3:07 PM / 5 months ago

FOREX-Dollar vulnerable as Italy crisis cools, EU inflation picks up

* Euro off 10-month low after 2nd-biggest daily gain of year

* Euro zone inflation jumps in May

* Canadian dollar up as BoC revives rate hike expectations (Updates analyst comments, exchange rates, refocuses on dollar; changes dateline; previous LONDON)

By Kate Duguid

NEW YORK, May 31 (Reuters) - The U.S. dollar was pushed lower on Thursday as the euro rallied on news that Italian parties made last-ditch efforts to form a government and avert snap elections, going some way toward easing concerns about a political crisis in the euro zone's third-largest economy.

The rise of a potentially euroskeptic government in Italy and the impact that could have on the stability of Europe had driven the euro to 10-month lows against the dollar on Tuesday.

"Italy has gone back to being seen as a problem, but maybe a contained problem, less of a global risk than it was on Monday and that’s weighing on the USD," said Daniel Katzive, head of FX strategy North America at BNP Paribas in New York.

The euro strengthened against the dollar on Thursday, climbing half a percent to a three-day high of $1.1724, after 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 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 eased fears of a snap election that some say would effectively be a referendum on Italy's euro membership.

Euro zone inflation jumped far more than expected in May on higher energy costs, data showed on Thursday, bringing some relief to the European Central Bank after market turbulence that has jeopardized its planned exit from its crisis-era stimulus program.

An economic slowdown in Europe has pushed the euro lower since mid-April and reduced expectations for an early rate hike from the ECB. Thursday's inflation data could help put an ECB hike and unwinding back in play.

The inflation data had minimal immediate impact on the euro. But combined with Wednesday's hawkish message from the Bank of Canada, which strengthened the loonie as much as 1.4 percent against the dollar, it left the U.S. dollar vulnerable. This hurts the greenback more broadly "because it reinforces the theme that the rest of the G10 is normalizing rates and the (Federal Reserve) is no longer a unique central bank," said Katzive.

The dollar shed 0.5 percent to 108.37 yen, edging back toward Tuesday's five-week low of 108.10 yen.

The dollar index, which measures the greenback against a basket of six major currencies, was down 0.15 percent at 94.0 after having dipped as much as 0.4 percent on the day to 93.717.

Reporting by Kate Duguid in New York and Tom Finn in London; Editing by Dan Grebler

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