LONDON: The euro fell to a seven-week low on Tuesday as the dollar rose broadly and concerns persisted about a row in the European Union over Italy's budget.
The euro has tended not to budge in response to spikes in Italian bond yields triggered by developments in the dispute, with investors judging that Rome's spending plans will not impact the monetary policy of the European Central Bank.
But the threat of a showdown along with weakness in stock markets worldwide has seen traders who had bet on a fourth quarter euro rebound ditch the single currency.
The euro fell 0.4 percent to $1.1444, its lowest since Aug. 20.
"Concerns over Italy have largely remained contained, dampening downside risks for the euro in the near-term, but it may not remain that way if Italian risks continue to escalate," said analysts at MUFG.
The dollar strengthened across the board helped by U.S. Treasury yields resuming their steep climb to seven-year highs. Only Japan's yen outperformed the dollar among the major currencies.
Against a basket of its rivals, the greenback rose 0.3 percent to 96.081, not far off a seven-week top of 96.127 hit last week.
Italian Economy Minister Giovanni Tria struck a resolute tone on his controversial budget plans in Rome's parliament and that saw Italy's benchmark 10-year government bond yield move towards a 4-1/2-year high.
"In light of current levels of stress in the Italian markets, the question now is how far the Bund/BTP yield gaps can blow out and how this could translate back into the FX market," said Simon Derrick, chief currency strategist at BNY Mellon.
Italy's Deputy Prime Minister on Monday denounced European Commission President Jean-Claude Juncker and Economics Commissioner Pierre Moscovici as enemies of Europe.
Derrick said increasingly it was the dollar rather than the Swiss franc that was benefiting from safe-haven trades in response to the concerns over Italy.
Against the Swiss franc, the euro gained 0.2 percent to 1.1376.
The Chinese offshore yuan was slightly weaker on the day at 6.9350 yuan per dollar. It recovered somewhat after slipping about 0.35 percent overnight.
At the weekend, China's central bank moved to inject more liquidity into the financial system as policymakers worried about the economic impact of a heated trade row with the United States.
"U.S. yields are rising, whereas the Chinese authorities are trying to push down the Chinese yield. That's typically a stronger dollar/weaker renminbi situation," Masafumi Yamamoto, chief currency strategist at Mizuho Securities, said.