Euro skids as Italy votes 'No' on reform, dollar in demand

Reuters News
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Posted: Dec 04, 2016 5:45 PM

By Wayne Cole

SYDNEY (Reuters) - The euro slid in Asia on Monday after exit polls showed Italian Prime Minster Matteo Renzi clearly losing a constitutional referendum that could end his career and destabilize the country's shaky banking system.

The single currency dropped to $1.0577 in thin trade, after starting around $1.0645 earlier. The dollar was underpinned by expectations of a U.S. rate rise this month, and even held its ground on the safe-haven yen at 113.20.

Dealers said Italian bonds were set to come under pressure as top-rated U.S. Treasuries and German bunds gained. Asian investors are often reluctant to trade on European developments, preferring to wait for the continent's markets to open.

Investors and Europe's politicians fear victory for the opposition 'No' camp could cause political instability and renewed turmoil for Italy's banks, pushing the euro zone towards a fresh crisis.

Renzi will address the nation around midnight (6.00 p.m. ET).

Ultimately, the danger is that Italy holds a vote on whether to leave the euro, possibly triggering a break up of the entire bloc.

Analysts at RBCCM argued that, based on what happened in 2012 at the height of the Greek crisis, such a risk could see the euro trade as low as $0.8000.

"It may sound extreme, but if a second euro zone crisis were to hit, with the U.S. dollar at a much stronger starting point, EUR/USD could arguably trade lower still," they wrote.

Markets had earlier taken some encouragement when Austria's far-right presidential candidate was soundly defeated by a pro-European contender, confounding forecasts of a tight election.

The European Central Bank also meets Thursday amid much speculation it will announce a six month extension of its asset buying program and widen the type of bonds it can purchase.

"There has been some speculation that the ECB would step and front load purchases of Italian bonds if markets became unsettled by a 'No' result, so perhaps it is the thoughts of a central bank liquidity sugar pill driving things again," said ANZ economist Jo Masters.

OIL ON A ROLL

Wall Street had ended last week on a cautious note, with the Dow off 0.11 percent, while the S&P 500 rose 0.04 percent and the Nasdaq gained 0.09 percent.

While Friday's U.S. payroll report was firm enough to cement expectations of a rate hike by the Federal Reserve this month, a surprise pullback in wages helped bonds pare a little of their recent losses.

Yields on the 10-year Treasury note stood at 2.389 percent.

In commodity markets, oil had boasted its best week in at least five years following OPEC's decision to cut crude output.

Markets are now focused on the implementation and impact of OPEC's first output cuts since 2008, to be joined by Russia and possibly other non-OPEC producers. [O/R]

U.S. crude had yet to trade having settled at $51.68 on Friday.

(Editing by Lincoln Feast)