Euro slumps to almost two-week low

London — The euro fell on Friday to its lowest in nearly two weeks while Italy’s bond yields hit their highest in three after the government agreed to set a higher than expected budget deficit target that could put Rome on a collision course with Brussels.

The Italian government on Thursday targeted a budget deficit of 2.4% of GDP for the next three years, marking a victory for party chiefs over economy minister Giovanni Tria, an unaffiliated technocrat.

The deficit, although within the prescribed EU limit of 3% of GDP, is a concern for investors who fear the country’s anti-establishment government is not committed to tackling its huge debt load. Italy’s debt-to-GDP ratio stands at about 130%, the highest in the eurozone behind Greece.

European shares opened lower, with shares in Italian banks — whose big sovereign bond portfolios make them sensitive to political risk — bearing the brunt of selling pressure. The pan-European Stoxx 600 index was down 0.3% by 7.43am GMT.

Italy’s FTSE MIB fell 1.9%, while Germany’s DAX dipped by 0.4%.

Italy’s two-year bond yields — the most sensitive to political noise in recent months — were up 31 basis points in early trade at 1.09%.

Other Italian yields were also higher on the day, with five-year yields rising 26 basis points (bps) to 2.16% and benchmark 10-year yields up 17bps at 3.08%.

The euro fell to an 11-day low of $1.1615 after suffering its worst one-day decline in seven weeks on Thursday.

“The 2.4% target is not consistent with an improvement in the structural budget balance and hence they seem to be on a collision course with Brussels,” said ING strategist Martin van Vliet.

“For me the key issue is what they assume on the budget beyond 2019. They are seemingly leaving the path of fiscal consolidation and that may not sit well with ratings agencies.”

The falls in European shares left MSCI’s All-Country World index down 0.1% and set for its first weekly loss since early September.

In Asia earlier, Japan’s Nikkei raced to a 27-year high on the back of a lower yen and improved prospects for corporate earnings.

Japan’s Nikkei stock index rose as high as 24,286.10 points, its strongest since November 1991, on renewed optimism over the global economy and hopes of a boost to exporters’ earnings from a weaker yen. It was last up 1.5%.

Shares in China were higher ahead of a week-long national holiday. Blue-chip stocks gained 0.8% and the country’s main Shanghai Composite index was up 0.7%.