Euro rises on the backdrop of Italy’s pledge, Canadian dollar falls after G-7

NEW YORK — The euro rose to a near two-week high on Monday after assurances from Italy that it would not leave the European Union calmed investors’ nerves before the European Central Bank (ECB) policy meeting on Thursday.

Italy’s Economy Minister Giovanni Tria said on Sunday his new coalition government would not leave the euro or issue securities to pay off companies owed money by the state, a plan investors viewed as a first step toward exiting the bloc. 

Tria’s promise sent Italian borrowing costs down sharply on Monday as the euro inched up 0.1 per cent to $1.1782 towards a two-week high of $1.1840 touched on Thursday, Reuters data showed.

“The Italy comments calmed fears but let’s wait for the government’s policy actions this summer. That will decide the market’s direction,” said MUFG currency strategist Lee Hardman.

Investors are raising their bets that the ECB will signal at a policy meeting later

this week a tapering down of its 2.55 trillion euro bond-buying programme as early as September, following a flurry of hawkish comments by officials last week.

The euro bounced despite heightened worries about a global trade war following a spat at the G-7 summit in Canada between US President Donald Trump and other leaders over automobile tariffs and other issues. Trump lashed out at Canada and Europe over the US trade deficit after he arrived in Singapore, where he is due to hold a critical meeting with North Korean leader Kim Jong-un on Tuesday.

The Mexican peso and Canadian dollar slid on fears that Trump may scrap the North American Free Trade Agreement. 

The Canadian dollar fell 0.5 per cent to C$1.2993, while the Mexican peso shed 1.1 per cent at 20.522 peso per US dollar. 

Analysts said the fairly muted reaction in currencies reflected the low expectations markets had for the G-7 summit, despite the fact that the euro is sensitive to the threat of US tariffs on cars.

“Trade tensions are dominating in the aftermath of the G-7 summit and headline risk is set to remain elevated in the absence of any significant domestic releases,” ScotiaBank analysts wrote in a research note.

Before the ECB meeting, the US Federal Reserve is almost unanimously expected to raise interest rates for the second time this year on Wednesday. The market’s focus will be on the Fed’s projection on the path of future interest rates.

Futures market implied traders expect the Fed to raise overnight borrowing at least one more time in 2018 after a possible rate increase on Wednesday, according to CME Group’s FedWatch programme.

The dollar index was steady at 93.597, rising further from a three-week low set last Thursday.