* Euro reverses gains after Italian newspaper report
* Dollar rallies, builds on small Fed hike strength
* Australian dollar hit hard; emerging currencies rally
* Graphic: World FX rates in 2018 tmsnrt.rs/2egbfVh
By Tommy Wilkes
LONDON, Sept 27 (Reuters) - The euro fell on Thursday on media reports that an Italian budget meeting was likely to be delayed, spooking traders concerned the ruling parties will push for a bigger deficit target in the euro zone’s third-largest economy.
Political wrangling over the budget in heavily indebted Italy has overshadowed a recent revival in the euro’s fortunes against the dollar.
Italian daily La Stampa said Economy Minister Giovanni Tria “was ready to leave,” before a spokeswoman for the ministry denied that the minister planned to quit.
Some market participants attributed the euro’s drop to a report by the Corriere della Serra that the budget meeting scheduled for 1600 GMT was likely to be delayed.
The euro fell half a percent to as low as $1.1685, its weakest since Sept. 20.
“There is concern the parties will push for a bigger deficit target,” said Alvin Tan, an FX strategist at Societe Generale.
He said Tria’s reported willingness to accept a deficit target of 2 percent of economic output would be the “threshold” at which the market would judge new proposals.
Thanks to the euro’s slip, the dollar added to its modest overnight gains following the Federal Reserve’s interest rate hike.
The dollar index, which measures the greenback against a basket of currencies, rose 0.4 percent to 94.529.
The index had scaled a 13-month high in mid-August, drawing safe-haven demand as trade-related tensions buffeted riskier currencies. The index has since fallen about 2.8 percent from the peak as investors become less concerned about the U.S.-China trade conflict impacting global growth.
The Fed hiked rates for the third time in 2018, but the raise was expected. The central bank still foresees another rate hike in December, three more next year, and one increase in 2020.
It also dropped a reference in its statement to the word “accommodative”, although Fed Chairman Jerome Powell later said policy was still accommodative. The Fed has gradually raised rates since late 2015 from a near-zero level.
Long-term U.S. Treasury yields declined following the Fed’s tightening, pulling back from four-month highs of 3.11 percent scaled earlier in week, with some investors thought to have wagered the Fed would hint at faster monetary tightening.
“The Fed meeting did not provide strong direction for currencies. This is because policymakers’ economic views and their outlook on rate hikes through 2020 were mostly as expected,” said Junichi Ishikawa, senior FX strategist at IG Securities.
The greenback slipped 0.1 percent to 112.60 yen, having dropped from a two-month peak of 113.145 brushed on Wednesday.
The Australian dollar, seen as a barometer of global investor risk appetite and Chinese demand for goods, fell 0.4 percent to $0.7226, its lowest since September 19 and not far off its 2-1/2 year lows of $0.7085 hit earlier this month.
Emerging market currencies such as the Mexican peso and the South African rand held gains after rising overnight, relieved that the Fed’s projected path of rate increases were in line with expectations. (Reporting by Tommy Wilkes; Additional reporting by Shinichi Saoshiro in TOKYO; Editing by Hugh Lawson)