Euro hits near 2-year low, testing key levels
The euro tumbled in early Asian trade on Monday after Italian Prime Minister Matteo Renzi said he would resign after conceding defeat in a referendum over his plan to reform the Constitution.
The euro dropped 1.3 percent to $1.0505, falling below its 1 1/2-year low of $1.0518 touched late last month, and testing its key support levels where the currency has managed to rebound in the past couple of years.
A break below its 2015 March low of $1.0457 would send the currency to its lowest level since early 2003, opening a way for a test of $1, or parity against the dollar, a scenario which many market players now see as a real possibility.
Renzi’s departure looks set to boost political uncertainty in the eurozone’s third largest economy, as his Democratic Party is running neck-and-neck with the antieuro 5-star Movement in the opinion polls.
It also came at a bad time for Italy’s fragile banking system, as Monte dei Paschi di Siena, the country’s third biggest but ailing lender, needs to raise $5.4 billion by year end to avert the risk of being wound up.
“The ‘No’ vote was priced in to a certain extent in advance. So I do not expect a freefall in the euro in the near
In the long run, this will delay progress in Italy’s efforts to get rid of banks’ bad debt.” Minori Uchida, analyst at the Bank of Tokyo-Mitsubishi
term,” said Minori Uchida, chief currency analyst at the Bank of Tokyo-Mitsubishi.
“But in the long run, this will delay progress in Italy’s efforts to get rid of banks’ bad debt and is likely to widen the yield spread of German Bunts and the Italian bonds,” he added.
The outcome could be taken as another sign of rising anti-establishment sentiment in the core of Europe, potentially eroding investor confidence in the euro ahead of elections in France and Germany next year.
One comfort for investors, however, was that Austrian voters roundly rejected on Sunday a candidate vying to become the first freely elected far-right head of state in Europe since World War II, halting at least temporarily the wave of populism sweeping Western countries.