May 18, 2018 / 1:42 AM / 4 days ago

Euro headed for fifth successive weekly decline as Italy concerns persist

LONDON (Reuters) - The euro was headed on Friday for its fifth successive weekly decline versus the dollar, in what would be a first for the currency since 2015, as political uncertainty in Italy continued to worry investors.

FILE PHOTO: Euro, Hong Kong dollar, U.S. dollar, Japanese yen, pound and Chinese 100 yuan banknotes are seen in this picture illustration, January 21, 2016. REUTERS/Jason Lee/Illustration/File Photo

The euro has slumped six cents from more than $1.24 in the space of three weeks after a huge dollar rally and amid concerns about the demands of populist parties likely to form Italy’s next government.

On Thursday, the far-right League and 5-Star Movement agreed the basis for a governing accord that would slash taxes and ramp up welfare spending.

Ratings agency DBRS warned that the economic proposals of the anti-establishment parties could threaten Italy’s sovereign credit rating.

The euro on Friday inched up 0.2 percent to $1.1814 EUR=EBS. But the currency has fallen nearly 1.2 percent this week and on Wednesday dropped to a five-month low of $1.1763.

“The possibility of a eurosceptic government in Rome is shaking investor confidence... at this point a larger fiscal deficit and greater bond issuance [in Italy] does seem likely,” said David Madden, a strategist at CMC Markets.

A founding member of the EU and the euro, Italy accounts for 15.4 percent of Eurozone GDP and the parties’ hostility toward the European Union stance is the biggest challenge to the bloc since Britain voted to leave two years ago.

Still, some investors have played down the broader impact on the euro and questioned whether the Italian parties will really follow through on such plans.

A powerful rally by the dollar is also hurting the euro.

On Friday the greenback edged higher against the yen and set a fresh four-month high, buoyed by a further rise in U.S. Treasury yields US10YT=RR that suggests a an upbeat outlook for the world’s largest economy.

The dollar, which has risen 5 percent since mid-February, touched a high of 111.005 yen on Friday, its strongest level since Jan. 23. JPY=EBS

“Moves in U.S. yields remain the focus. If they rise further the dollar could strengthen on the back of that and pull the dollar higher against the yen,” said Shinichiro Kadota, senior strategist at Barclays in Tokyo

Investors are betting that U.S. interest rates will need to rise further to curb inflation.

That has forced investors who took big positions against the dollar anticipating it would fall in 2018 to rush to unwind and cover their positions, pushing the greenback even higher.

In a note to clients, strategists at Citibank said the current rally in the dollar would not last long.

The U.S. budget deficit, which is projected to balloon to more than $1 trillion in 2019, they said, would contribute to a drop of 5 percent in the dollar index over the next 12 months.

Most emerging market currencies continued to wilt against the surging dollar.

The Indonesian rupiah IDR= weakened half a percent to 14,115, its lowest in more than 2-1/2 years and shrugging off a rate rise by the central bank late on Thursday.

Additional reporting by Masayuki Kitano in Singapore; Editing by Peter Graff

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