The U.S. dollar strengthened early Friday, adding to Thursday’s performance as traders digested the news of Italy’s budget proposal and the effect it could have on the euro.
Indeed, the euro EURUSD, -0.5239% was the weakest performer among major currencies on Friday after Italy’s government agreed on a budget proposal that would push the country’s deficit to 2.4% of GDP. Finance Minister Giovanni Tria had been calling for a lower deficit, previously clashing with the coalition leaders.
Don’t miss: Italy’s budget drama: What you need to know
Italy’s deficit size is a concern to investors because the country’s economy is systemically important for the European Union. After the U.K. completes Brexit, Italy will be the third-largest economy of the bloc. Moreover, the proposed deficit pushes Italy closer to the limit of the EU’s deficit guidelines, possibly straining the relationship between Rome and Brussels.
And with the European Central Bank winding down its asset purchases, market participants are concerned about Italy’s ability to raise debt without the purchasing power of the central bank.
The euro last bought $1.1583, compared with $1.1643 late Thursday, marking its lowest level in about two weeks. Italian stocks I945, -3.98% meanwhile faced the worst day in about two years. Italian bond yields TMBMKIT-10Y, +11.57% were also on the rise in response, last yielding 3.2%.
“Developments in Italy are a clear negative [for the euro], while the technical tone remains weak,” wrote Win Thin, global head of currency strategy at Brown Brothers Harriman. With respect to Finance Minister Tria, he added “we suspect Tria’s capitulation will lead the rating agencies to downgrade Italy in the coming weeks.”
Meanwhile in the U.S., the popular ICE U.S. Dollar Index DXY, +0.34% climbed 0.5% to 93.319. For the week it is headed for a 1.2% gain.
Dollar traders are also watching for economic data, including core inflation at 8.30 a.m. Eastern and consumer sentiment at 10 a.m.
The greenback hit its highest level since December against Japan’s yen USDJPY, +0.09% overnight, despite supportive economic data in Japan, as the buck climbed higher. One buck last bought ¥113.36, little changed from late Thursday in New York and down from its session high of ¥113.64.
On the last trading day of the third quarter, the dollar-yen pair was also the best developed world performer between July and September, seeing the buck gain 2.6% against its Japanese rival. The pair was followed by the Swiss franc USDCHF, -0.0409% which gained more than 2% over the past three months.
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