Dollar vulnerable as Italy crisis cools, European Union inflation picks up

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Italy's anti-establishment political leaders Matteo Salvini and Luigi Di Maio met on Thursday for last-ditch talks to resurrect a coalition government and avert a new snap election, the prospect of which has rattled global markets.

Smaller companies, which tend to be more USA -focused than the large multinationals in the Dow, fared much better than the rest of the market.

"At these levels, I think the dollar is almost priced to perfection and we think the euro should see a rebound from later this year", said Paul Baird, head of fixed income at Newton Asset Management, a subsidiary of BNY Mellon which manages $49.8 billion in assets globally. Instead, he named an economist, Carlo Cottarelli, to lead the country until new elections.

A view of the Goldman Sachs stall on the floor of the New York Stock Exchange July 16, 2013.

Italian stocks rallied 2.6 percent, the standout performers in Europe.

That's because a political government would avoid an early election that investors worry would be seen as a referendum on the euro.

Italy, the eurozone's third biggest economy after Germany and France, has been plunged into crisis with President Sergio Mattarella at the weekend vetoing the nomination of a fierce eurosceptic as economy minister.

Britain's FTSE 100 sank 1.2 percent and the French CAC 40 slumped 1.2 percent.

In Spain, that country's parliament will hold a vote of no confidence in Prime Minister Mariano Rajoy after graft convictions of businesspeople and officials tied to his conservative Popular Party.

The euro traded at $1.1669, having risen 1.1 per cent the previous day, its second-biggest daily gain so far this year.

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The yield gap over benchmark 10-year German bond yields tightened to 215 basis points from around 242 bps late Thursday. Meanwhile, the dollar was up against nearly all major currencies except the safe-haven Japanese yen.

USA investment bank Goldman Sachs said today it had cut its euro/dollar forecast for the next 3, 6 and 12-months because of uncertainty stemming from Italy's political crisis, while HSBC said the dollar's recent rally had further to run.

An underlying theme that has pushed the euro lower since mid-April is a slowdown in Europe and the subsequent retreat in expectations for an early rate hike from the European Central Bank.

The Australian and New Zealand dollars were steady at US$0.7545 and US$0.6939, respectively.

USA crude oil fell 25 cents to $66.50 per barrel in electronic trading on the New York Mercantile Exchange.

Japan's Nikkei 225 fell 0.6 percent to finish at 22,358.43 while South Korea's Kospi lost 0.9 percent to 2,457.25.

Oil prices remained under pressure from expectations that Saudi Arabia and Russian Federation would pump more crude, even as U.S. oil output rises.

The US Automakers' report for May is also due on Friday.

Brent crude futures edged up 0.3 per cent after dropping to $74.49 per barrel on Monday, their lowest in about three weeks.

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