The euro hovered near a one-week low against the dollar on Friday as the European Commission’s criticism of Italy’s populist budget sparked fresh concerns about political tensions in the common currency zone.
The dollar index, a gauge of its value against major peers, was 0.05 per cent higher at 95.96 on Friday, having closed on Thursday at its highest level since Aug. 21.
That rise was driven by a steep fall in the euro on Thursday, which constitutes around 57 per cent of the index.
The euro was relatively flat at $1.1454 on Friday, steadying slightly after losing 0.4 per cent overnight.
The single currency hit its lowest intra-day level of 1.1447 since Oct. 9 on Thursday after the European Commission said Italy’s 2019 budget draft is in serious breach of European Union budget rules.
The Commission said in a letter to Italian Economy Minister Giovanni Tria, that planned government spending was too high, the structural deficit – excluding one-offs and business cycle effects – would rise instead, not fall, and that Italian public debt would not come down in line with EU rules.
This has sparked investor concerns about more political tensions in the EU between Brussels and member states, which has hurt the euro.
The gap between Italian and German 10-year bond yield spreads hit its widest level in 5-1/2 years after news of the Commission letter broke.
Italy’s prime minister defended the nation’s free spending budget, though markets were not impressed.
“The euro decline reflects the build up of political tension in the eurozone,” said Sim Moh Siong, currency strategist at Bank of Singapore.
“The next support for the euro is at 1.1430, a break of which can take us down to 1.13.”