The euro has fallen to its lowest value against the dollar in almost a year. Investors fear Italy is heading toward fresh elections by the end of the summer, after populist parties there failed to form a government.The euro and US and European stock markets fell on Tuesday amid fears that political uncertainty in Italy could lead to broader instability in the eurozone.
Italy faces the prospect of fresh elections after populist anti-establishment, euroskeptic parties failed to form a government.
Read more: Italian stop-gap premier presents cabinet as League hits out at EU
How the market responded to Italy’s turmoil
The euro sank to its lowest value against the dollar since July, dropping to $1.1531 from $1.1669.
Stocks across Europe took a hit, with Italy’s benchmark stock index falling 2.7 percent, the German DAX falling 1.5 percent, and Britain’s FTSE 100 and the French CAC 40 falling 1.3 percent.
The yield on 10-year Italian government bonds increased significantly as investors, spooked by the political uncertainty, dropped them in favor of safer assets. It increased to 3.10 percent from 2.69 percent.
Reflecting the move to safer assets, the yield on US government bonds fell to 2.78 percent, the lowest percentage since the beginning of April, from 2.93 percent.
Stocks in the US were also down, with the S&P 500 index dropping 31.47 points, or 1.2 percent, to 2,689.86 and the Dow Jones industrial average losing 391.64 points, or 1.6 percent, to 24,361.45.
In early trading on Wednesday, Japan’s Nikkei 225 Index fell 374.17 points, or 1.67 percent, to 21,984.26, while Hong Kong’s Hang Seng Index fell 375.21 points, or 1.23 percent, to 30,109.37.
Read more: Italian populist coalition’s failure to govern throws government into doubt
‘Work things out within the eurozone’
A senior official in the US Treasury Department, speaking on the condition of anonymity, told reporters that Italy should work to resolve its current political crisis while staying within the eurozone.
“I think it would be better if they were to work things out within the eurozone without making significant changes there, and certainly the Italians have the opportunity to do that,” he said. He added that he saw no immediate danger to the stability of the wider financial system.
Why Italy matters
Italy is the third-largest economy in Europe that uses the euro currency. It has struggled to grow since the 2007-2009 financial crisis and has an enormous pile of debt. Investors are worried that euroskeptic parties could form a future government that would abandon the euro or commit to spending that would cause wider instability in the bloc.
What’s next?
The country is likely to hold fresh elections by the end of the summer after Italian President Sergio Mattarella blocked efforts by two euroskeptic parties — the populist 5-Star Movement (M5S) and the right-wing League — to form a coalition government. Mattarella has tasked former economist Carlo Cottarelli with forming a caretaker government, but it is unlikely to win necessary approval from the Italian parliament.
Not just Italy
Other challenges are also putting a strain on global markets, including international trade tensions over US protectionist tariffs and uncertainty about the future of the 2015 Iran nuclear deal, along with nuclear tensions between the US and North Korea.
Read more: EU chides Budget Commissioner Günther Oettinger over Italy remarks
amp/cmk (AP, AFP, Reuters)
Each evening at 1830 UTC, DW’s editors send out a selection of the day’s hard news and quality feature journalism. You can sign up to receive it directly here.
