Euro Lower after Italy Election, Dollar Remains on Defensive

(March 05, 2018)  The euro was broadly lower on Monday after initial results from Sunday’s Italian elections indicated that there was no clear winner, while the dollar remained on the defensive amid fears over prospects for a trade war.

EUR/USD was down 0.15% at 1.2297 by 03:13 AM ET (08:13 AM GMT).

The single currency was pressured lower after Italian exit polls showed that voters favored anti-establishment and far-right parties, giving them considerable influence in the creation of a new government.

With no party winning an outright vote Italy is likely to be plunged into a protracted period of political instability, which could stall progress on economic reforms in the euro zone’s third-largest economy.

The euro had initially risen overnight after Germany’s Social Democrats voted to support a coalition government, allowing Angela Merkel to serve a fourth term as chancellor.

The euro was trading near six-month lows against the yen, with EUR/JPY down 0.41% to 129.70.

The Japanese currency was also higher against the dollar, with USD/JPY shedding 0.27% to trade at 105.45, hovering just above Friday’s 16-month trough of 105.24.

The dollar remained on the back foot after President Donald Trump announced plans last Thursday to impose heavy tariffs on steel and aluminum imports, raising fears over a trade war with major trade partners such as China, the European Union and Canada.

Those countries, which are major holders of U.S. Treasury’s, could protest the measures by reducing their holdings of U.S. assets.

The yen had already received a boost after Bank of Japan Governor Haruhiko Kurodasaid last week that the central bank would discuss an exit from its current aggressive monetary easing in 2020 if it met its 2% inflation target.

The U.S. dollar index, which measures the greenback’s strength against a basket of six major currencies, was up 0.13% to 90.07, supported by the weaker euro.

Sterling was lower against the dollar, with GBP/USD down 0.15% at 1.3777.

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