Dollar gains after election in Italy

The dollar rose against the euro yesterday as investors embraced safety against the backdrop of a political stalemate in Italy and with the United States only hours away from sweeping, automatic spending cuts that are expected to take a toll on the global economy.

Month-end flows made for choppy price action, with the euro poised to end February about 3.6 per cent lower against the dollar, which would mark its worst monthly performance since last May.

Political instability in Italy, the euro zone’s third largest economy, could continue to pressure the euro.

“Investors are worried about Italy, whose election stalemate this week left unresolved the country’s commitment to economic reforms,” said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington, DC.

“On this side of the Atlantic, meanwhile, big US budget cuts could come as soon as Friday,” he said.

There are fears that a lack of commitment to economic reforms in Italy could reignite the euro zone debt crisis, now in its fourth year. Because of the size of the Italian economy, the European Central Bank may offer support should the debt crisis take a turn for the worse.

Budget crisis

In Washington, positions hardened between President Barack Obama and Republican congressional leaders over the budget crisis even as they arranged to hold last-ditch talks to prevent the harsh automatic spending cuts due to begin on Friday. US politicians appeared resigned to the onset of the $85 billion in “sequestration” cuts.

“Given past experience, many investors have clung to hopes that Washington might strike an 11th-hour deal to avoid the big spending cuts or cobble together a plan in the coming weeks to blunt the impact on the economy,” Mr Manimbo said.

The International Monetary Fund said it will likely cut its growth forecasts for the US and the global economy if the spending cuts do take effect. It warned that the US’s biggest trading partners would be hardest hit.

The euro last traded at $1.3084, down 0.4 percent on the day, but above the session low $1.3055. – (Reuters)