FOREX-Euro falls towards 5-month lows on Italian concerns and U.S. bond yield rise

Reuters

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    * Euro struggles near $1.18 mark
    * Dollar rise leaves Yen at weakest since January
    * Emerging market currencies suffer more falls overnight
    * Graphic: World FX rates in 2018 http://tmsnrt.rs/2egbfVh

    By Tommy Wilkes
    LONDON, May 17 (Reuters) - The euro fell towards a
five-month low on Thursday as investors fretted about the
demands of populist parties likely to form Italy's next
government and as a fresh rise in U.S. Treasury bond yields
underpinned demand for the dollar.
    The euro has slumped six cents from more than $1.24 in the
space of three weeks after a huge dollar rally. Investors are
betting that U.S. interest rates will need to rise further to
curb inflation while other central banks are postponing monetary
tightening.
    That has forced investors who took big positions against the
dollar anticipating it would fall in 2018 to rush to unwind and
cover their positions, pushing the greenback even higher.
    Some analysts say the market remains complacent about the
possibility of a rising dollar, which also notched up a
four-month high against the Japanese yen on Thursday as 10-year
Treasury yields  US10YT=RR  approached their highest since 2011.
    The euro slid 0.2 percent to $1.1787  EUR= , slightly above
the $1.1763 2018 low it hit on Wednesday.
    "This sense of a market that is not particularly well
prepared for a euro decline is supported by the benign
valuations still evident in the pricing of six-month and
12-month implied volatility," BNY Mellon analysts said in a
note, referring to prices of a measure of expected swings in the
value of the euro.
    The dollar index rose 0.1 percent to 93.502  .DXY , below
its 2018 high of 93.632.  
    The euro is also suffering from reports Italy's
anti-establishment 5-Star Movement and the anti-immigrant
League, which are working to draft a coalition programme, may
ask the European Central Bank to forgive 250 billion euros of
debt.  urn:newsml:reuters.com:*:nL5N1SMA1R
    But broader Italian markets held up better on Thursday as
investors played down the broader impact on euro zone political
stability and questioned whether the Italian parties would
really follow through on such plans.
    "The sheer outlandishness of some leaked plans helped ease
investor concerns a bit. The would-be coalition's denials that
leaked draft policies were ever concrete plans also helped
smooth markets," said Ken Odeluga, an analyst at City Index.
    Sterling gave up earlier gains after the UK government
dismissed a media report that Britain wanted to stay in the
European Union's customs union after Brexit.  urn:newsml:reuters.com:*:nS8N1ME023
    The dollar rose to its strongest versus the Japanese yen
since Jan. 23, up 0.3 percent on the day at 110.70 yen  JPY= .
    The Australian dollar added 0.1 percent to $0.7524  AUD= 
after gaining 0.6 percent overnight, buoyed by a rise in prices
of commodities such as copper. Other commodity-linked currencies
like the Canadian dollar  CAD=  also advanced.
    Volatile emerging market currencies, the biggest losers from
the dollar's recovery, took another beating.  urn:newsml:reuters.com:*:nL5N1SO21I
    Rising Treasury yields have enhanced the dollar's appeal and
raised global borrowing costs. For emerging markets with current
account deficits that means higher costs and the risk of fund
outflows and their currencies declining further, analysts say.
    The Indonesian rupiah  IDR=  recovered from its weakest
since October 2015 after the central bank raised its interest
rate for the first time since 2015 to boost the fragile
currency.  urn:newsml:reuters.com:*:nL3N1SO3A9
    Brazil's real  BRL=  dropped to a two-year low against the
dollar overnight
    The Turkish lira  TRY=  and Argentine peso  ARS= , which
have been at the heart of the emerging market selloff, both
slumped again but traded above record lows hit earlier in the
week.

 (Editing by Catherine Evans)
 ((thomas.wilkes@thomsonreuters.com))

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