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Euro sags to near 7-week low vs. Dollar

Euro sags to near 7-week low vs. Dollar

The Euro skidded close to a 7-week low against the Dollar on Tuesday as the spectre of political gridlock in Italy spurred traders to seek refuge in the U.S. Italy’s centre left won the lower house as widely expected, but projections by Italian media indicate no party or coalition will be able to form a majority in the upper house or Senate. A deadlocked parliament could threaten Italy’s economic reforms and reignite fears about Eurozone debt. That could reverse the optimism that the worst of the region’s crisis was over, which had benefited the Euro and riskier assets in general earlier this year.

Central banks should conduct monetary policy for domestic reasons and if they follow this rule then global economic growth will accelerate, Bank of England Governor Mervyn King said on Tuesday. Group of Seven countries were in agreement that no country should intervene in foreign exchange or have a specific target for their currency, but that if a country is pursuing policies to boost its domestic economy this could cause the country’s currency to fall, King said after giving a speech in Tokyo. Policymakers considered expanding the range of assets they purchased under quantitative easing — typically negative for a currency because pumping more money into the economy increases the supply — and cutting interest rates.

On the FX markets, the lack of a clear winner in the Italian election weighed heavily on the euro with EUR/USD falling over 2.5 cents to hit a low of $1.3047. Sterling also made gains with GBP/EUR recovering from a 16 month low of €1.1340 and breaking through the €1.16 level. A combination of risk-off sentiment and market positioning prompted overnight gains for the Yen with USD/JPY down over 2%.

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