The U.S. dollar broadly strengthened Friday, its move notable against the euro after the Italian government’s ballooning deficit target sparked a selloff in the country’s bonds and weighed on the shared currency.
Indeed, the euro EURUSD, -0.2663% was the weakest performer among major currencies on Friday after Italy’s government agreed on a deficit target of 2.4% of gross domestic product, well above the current level and overcoming resistance by Economy Minister Giovanni Tria, who was reportedly pushing for a deficit figure closer to 1.6% of GDP.
Don’t miss: Italy’s budget drama: What you need to know
Italy’s deficit size is a concern to investors because its economy is the third largest in the eurozone. And after the U.K. completes Brexit, Italy will be the third-largest economy in the broader European Union as well. Moreover, the proposed deficit is likely to push Italy into conflict with the EU’s deficit rules, possibly leading to a showdown between Rome and Brussels.
And with the European Central Bank winding down its asset purchases, market participants are concerned about Italy’s ability to raise debt without the purchasing power of the central bank.
The euro last bought $1.1616, compared with $1.1643 late Thursday, having recovered from its session low at $1.1570 that marked a two week-low. The shared eurozone currency is on track for a 0.7% quarterly loss.
Italian stocks I945, -3.72% meanwhile faced the worst day in more than two years. Italian bond yields TMBMKIT-10Y, +8.62% were also on the rise in response, last yielding 3.142%.
“Developments in Italy are a clear negative [for the euro], while the technical tone remains weak,” wrote Win Thin, global head of currency strategy at Brown Brothers Harriman. With respect to the economy minister, he added “we suspect Tria’s capitulation will lead the rating agencies to downgrade Italy in the coming weeks.”
Meanwhile in the U.S., the popular ICE U.S. Dollar Index DXY, +0.18% pared some of its earlier gains but remained 0.2% higher at 95.110, on track for a 0.9% weekly and 0.5% quarterly gain.
In U.S. data, August core inflation came in flat, compared with consensus forecasts of 0.1%, while both personal income and consumer consumption grew 0.3% in August, slightly undercutting expectations. Consumer-sentiment for September read 100.1 versus the consensus of 100.8, remaining near a 14-year high.
The greenback hit its highest level since December against Japan’s yen USDJPY, +0.22% overnight, despite supportive economic data in Japan, as the buck climbed higher. One buck last bought ¥113.58, up from ¥113.38 late Thursday in New York
On the last trading day of the third quarter, the dollar-yen pair was also the best developed world performer between July and September, seeing the buck gain 2.6% against its Japanese rival. The pair was followed by the Swiss franc USDCHF, +0.4400% which gained 1.2% over the past three months, and the Canadian dollar USDCAD, -0.9431% that is on track to end the third quarter 1.6% higher against the buck.
After the U.S. and Mexico came to an agreement on trade in August, Canada has been lagging behind in joining its partners in the North American Free Trade Agreement. U.S. and Canadian officials have until the deadline on Sunday to find common ground. Earlier, St. Louis Federal Reserve President James Bullard said reaching a renegotiated Nafta deal would be a “very big positive”.
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