Currency traders focused on major pairs early Monday, as developments surrounding Italy’s budget and Brexit pushed the euro and British pound down and gave way to a rallying U.S. dollar.
Investors watched closely for the next moves made between Italy and the European Union, which weighed on the shared eurozone currency and dragged it to its lowest level since June 2017. Rome’s first budget proposal for 2019, including a ballooning deficit, was rejected last month.
Because Italy is the eurozone’s third-largest economy, market participants are watching closely the escalating conflict from its political implications for eurozone stability and its financial and economic implications, should the nation not be able to control its debt burden.
Read: Italy is ‘the No. 1 risk factor in the fourth quarter’ for European investments
Also see: Here’s why investors remain uneasy about Italy’s banks and the ‘doom loop’
“Rome has until tomorrow to resubmit its draft budget after which an excessive deficit procedure could be opened against it and sanctions applied if it doesn’t comply,” wrote Craig Erlam, senior market analyst at Oanda.
“This is only likely to fuel the growing populism in Italy, so is something Brussels would surely rather avoid, but with Rome currently refusing to shift from its 2.4% deficit target for 2019, something is going to have to give,” Erlam said.
The euro EURUSD, -0.5734% weakened below the level of $1.13 in response and dropped to its lowest since late June 2017. The shared currency last bought $1.1267, down from 1.1336 late Friday in New York.
The ICE U.S. Dollar Index DXY, +0.36% rose to its best level in more than 17 months, last up 0.5% at 97.376.
Meanwhile, in the U.K., the British pound GBPUSD, -0.8170% was off to a weak start at the beginning of the week, as Brexit negotiations once again weigh on the currency. One pound last bought $1.2871, down from $1.2974
Transport minister Jo Johnson resigned on Friday, making him the latest official to resign over the handling of the negotiations between Brussels and London. After it seemed plausible for a deal before year-end as some progress was made over the past weeks, optimism has since waned.
The Irish border continues to be one of the central talking points to get a deal done, while confidence that Prime Minister Theresa May will be able to get an agreement through parliament swings from week to week.
Want news about Europe delivered to your inbox? Subscribe to MarketWatch’s free Europe Daily newsletter. Sign up here.