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LONDON (Reuters) – The euro fell towards a two-month low on Friday after the European Union criticized Italy's spending plans, raising fresh concerns about a conflict within the common currency zone.
FILE PHOTO: Euro, Hong Kong dollar, US dollar, Japanese yen, pound and Chinese 100 yuan banknotes are seen in this picture illustration, January 21, 2016. REUTERS / Jason Lee / Illustration / File Photo
Political wrangling over the budget in heavily indebted Italy has seen the euro weaken over 1 percent versus the dollar this week.
The European Commission on Thursday sent a letter calling for a draft budget on "unprecedented" breach of EU fiscal rules, the first step of a procedure that could end with Brussels rejecting the budget and fining Italy. .
The single currency fell to an intra-day low of $ 1.1433 = EBS close to a two-month low of $ 1.1432 hit on October 9. At 1100 GMT it traded 0.1 percent up on the day at $ 1.1464.
Italy is the third-largest economy of the 19-country euro zone, and it could have been completely blocked.
The gap between Italian and German 10-year bond yields and widest in 5 1/2 years after news of the Commission letter broke.
"The euro is already suffering considerably, and that could get worse if the crisis really gets going, [especially] "said Ulrich Leuchtmann, a currency strategist at Commerzbank.
Analysts at MUFG said that it could provide further pressure for the euro.
Investors have been pricing in the possibility that the tussle between Italy and the European Union will force the European Central Bank to be more cautious in removing stimulus.
ECB until October 2019. Earlier this week, they were projecting an increase next September.
The dollar index .DXY, a gauge of its value against major peers, traded at 95.9 on Friday, close to a two-month high of 96.155.
Meanwhile, the British pound rose after EU negotiator Michel Barnier said a Brexit deal with the United Kingdom was 90 percent done but that hurdles remained.
Sterling rose to a day high against the dollar of $ 1.3038 GBP = D3, broadly flat trading. It also increased 0.1 percent against the euro to 87.9 pence EURGBP = D3.
The Japanese JPY yen = D3 weakened 0.2 percent against the dollar on Friday, to trade at 112.37.
A global risk-off mood has prevailed this week amidst tension between the U.S. and Saudi Arabia, Italy's budget woes and U.S-Sino trade conflict.
China's economic growth in the third quarter slowed to 6.5 percent, its weakest since 2009 and below expectations, as a campaign to tackle debt risks and the trade war with the United States weighed on the economy.
The yuan CNY = D3 changed hands at 6.9341 on Friday trading down 0.1 percent against the dollar, close to a two-month low.
"Expectations have increased for the Chinese yuan to depreciate towards the psychological level of the USD," said Eugene Leow, rates strategist at DBS in a note.
editing by Larry King / Keith Weir
