LONDON: The euro climbed on Monday as political tensions eased in Italy, supporting a rebound in risk appetite as worries about an escalating trade battle between the United States and other major economies took a back seat.
Better-than-expected US jobs data last week underlined the strength of the US economy and the near-certainty of a Federal Reserve interest rate rise this month, as well as increasing expectations of a fourth hike this year, factors which have powered a recent revival in the dollar.
But with signs of less uncertainty in Italy as it forms a new government, the euro was able to claw back some gains.
Rallying stock markets also helped investors to shrug off concerns that trade disputes among the world's largest economies will hit growth.
German Chancellor Angela Merkel's weekend statement that Germany was in favour of moves toward a European Monetary Fund to resolve issues of euro zone sovereign debt sustainability also helped lift the mood.
The euro rose as much as 0.7 percent to $1.1737 to its highest level since May 24, pulling further away from 2018 lows of $1.151 plumbed last week. The euro also increased versus the Swiss currency as the rebound in risk appetite knocked the safe-haven franc.
Data last week showed euro zone inflation jumped far more than expected in May, boosting expectations of a European Central Bank rate rise in 2019.
ING analysts said the worst seemed to be over for the euro, at least in the near term.
"We suspect euro/dollar has seen its bottom at $1.1510 and is unlikely to re-test it this week. With the Italian political situation stabilising, the euro zone risk premium should now be less of a negative driver of euro/dollar," they said.
The prospect of a snap election in Italy shook investor risk sentiment last week as some feared the vote could effectively turn into a referendum on the country's euro membership.
But the euro has drifted up since then as markets gained some composure after a deal was reached on a coalition government, averting potentially destabilising snap elections.
However, many analysts caution that events in Italy, where the government between two anti-establishment parties says it will increase spending, slash taxes and challenge European Union fiscal rules, will continue to curb significant euro gains.
"Euro investors have every reason to remain nervous," said Thu Lan Nguyen, currencies analyst at Commerzbank in Frankfurt, predicting the new Italian government's plans would put it on a "confrontation course" with other euro zone members.
Commerzbank is sticking with its forecast of euro/dollar at $1.16 at end-2018. Other banks have cut their forecasts to between $1.16 and $1.25 after the dollar's rise from more than $1.24 in mid-April.
AUSSIE JUMPS
With the euro rallying, the dollar slipped more broadly on Monday, its index falling 0.4 percent to 93.784. It also gave up some of its earlier gains versus the yen.
The Australian dollar surged more than 1 percent to its highest level since April on an improvement in broader risk sentiment and domestic data showing strong company profits and a rise in retail sales.
The Aussie rose to $0.7630, on track for its biggest one day-rise since August.
The New Zealand dollar gained 0.8 percent while the Canadian dollar slid half a percent.
The Norwegian and Swedish crowns bucked the euro strength and gained 0.3 percent and half a percent respectively against the single currency.
Analysts said both had strengthened after expectations for tighter monetary policy in the euro zone increased, because investors believe their central banks will follow suit.
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