November 21, 2018 / 12:08 PM / 6 months ago

FOREX-Euro rallies on hopes of Italy budget compromise

* Euro rallies despite European Commission rejecting Italy budget

* Italy Deputy PM denies being open to reviewing fiscal plans

* Dollar looks bid amid fears of global growth

* Yen down, sterling up as investors await Brexit developments

* Graphic: World FX rates in 2018 (Adds Salvini comments, updates prices)

By Tom Finn

LONDON, Nov 21 (Reuters) - The euro strengthened on Wednesday on hopes for a compromise in the row over Italy’s budget, though the European Union rejected Rome’s fiscal plans for failing to comply with euro zone rules.

The European Commission took its first step on Wednesday towards disciplining Italy over its draft budget and said that the government should face action from the EU to reduce its deficit.

That did not stop the single currency from rallying to a day’s high of $1.1418, up 0.4 percent, after Italian Prime Minister Giuseppe Conte said he was worried about the government bond spread and would respond with reforms.

The euro spiked earlier in the session on a report that Deputy Prime Minister Matteo Salvini may be open to reviewing the fiscal plan for 2019.

Salvini later said he was not open to negotiations over Italy’s deficit target of 2.4 percent of gross domestic product, though other aspects of the budget could be discussed.

The euro has risen in six out of the last seven sessions but analysts said the currency remained vulnerable to the political risks emanating from the third-largest economy of the 19-country euro zone.

“The potential for a further tussle between Rome and Brussels can have an impact on the overall euro zone economic growth, which will keep the euro under pressure,” said Michael McCarthy, chief markets strategist at CMC Markets.

The euro’s strength weighed on the dollar index, a measure of performance against six major currencies, which fell 0.2 percent to 96.557. The index gained 0.65 percent the day before.

The dollar has been supported by investors seeking out the safe haven currency on mounting concern about global growth and a U.S.-China trade war.

However, the currency felt some downward pressure this week from comments by Federal Reserve officials expressing concern about a potential global slowdown. Those comments led some investors to bet the rate-hike cycle was near its end.

The Japanese yen fell 0.4 percent to trade at 112.71.

Despite its safe-haven status, the yen’s strength has been muted. Analysts suspect this is because Japanese investors have kept their money in U.S. and foreign markets, rather than bring it home.

The British pound traded up 0.2 percent at $1.2808 after losing 0.5 percent against the dollar on Tuesday. The pound is expected to trade sideways until the market gets more clarity on progress in the Brexit deal.

The Canadian dollar dropped to a four-month low versus the dollar to trade at 1.3305 as the price of crude fell to its lowest level in more than a year. Canada is one of the world’s top oil exporters.

Elsewhere, the Australian dollar, often considered a barometer of risk appetite, gained 0.4 percent to trade at $0.7245. The Aussie dollar lost more than 1 percent on Tuesday as global risk sentiment worsened. (Additional reporting by Vatsal Srivastava; Editing by Toby Chopra)

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