Italy sent financial markets a fresh reminder that European political and government debt risks are still lingering, after elections results in Rome delivered a hung Parliament and the prospect of anti-austerity Silvio Berlusconi returning to power. The euro melted in spectacular fashion after voting in Italy ended with a three-way split, reflecting growing support for leaders promising to pause austerity which could interrupt the eurozone’s progress on ending the debt crisis. The US dollar typically led the way for safe haven assets, climbing to six-month highs against a basket of currencies while equity markets around the globe sank. Members of the Bank of England will explain the central bank’s thoughts on monetary policy and the UK economy in Parliament and the examination could impact sterling.
Sterling
Investors put Britain’s ratings downgrade and worrying economic outlook to one side and delved back into Europe’s political risks that are threatening to reopen the eurozone debt crisis. Sterling has soared by three per cent against the euro since election polls revealed Italy is facing political gridlock amid growing support for parties offering voters an escape from austerity. The pound had tumbled to fresh 15-month lows versus the single currency as markets continued to react to Moody’s choice to slash Britain’s gold-plated AAA credit rating.
US dollar
Eurozone jitters have pumped up safe haven demand for the US dollar, with the greenback rocketing to two-month highs against the euro and six-month peaks overall ahead of semi-annual monetary policy statement from Federal Reserve chairman, Ben Bernanke. A hung Parliament in Italy, the euro area’s third largest economy, sent investors scrambling for safety with election results pointing to another new obstacle in the region’s efforts to hold down government debt risks.
Euro
The euro took a dramatic fall after an initial count of votes left Italy with a hung Parliament and the prospect of a lengthy period of political instability, damaging hopes the eurozone was nearing an end to its debt crisis. In a clear sign that Italians have become disconnected with the country’s efforts to appease its European partners with difficult spending cuts, results were split three ways, raising the prospect of a second election. The euro plunged close to two-month lows against the US dollar on fears former leader Silvio Berlusconi and his centre-right party could make up part of a potential coalition which could complicate Italy’s reform process.