The euro rebounded from ten-month lows against the dollar on Wednesday, erasing the previous day’s losses as financial markets recovered from a steep selloff sparked by political turmoil in Italy.
EURUSD rose 0.68% to 1.1614, bouncing back from Tuesday’s lows of 1.1509, which was the weakest level July 2017.
The single currency has fallen around 3.8% against the dollar so far, this month.
The recovery in the euro came despite ongoing uncertainty over the outlook for Italy amid fresh attempts by the anti-establishment Five Star and Lega parties to revive their coalition plans.
Financial markets were roiled on Tuesday after the populist parties abandoned their bid to form a coalition government when the country’s president vetoed their choice of finance minister over his threats to pull Italy out of the euro zone, raising the prospect of fresh elections.
Investors fear that repeat elections could be seen as a referendum on Italy’s role in the European Union and its future in the euro zone.
But investors remained wary as political risk in the euro area remained elevated. In Spain, Prime Minister Mariano Rajoy is facing a vote of no confidence in the government on Friday, after a corruption case involving members of the ruling party.
A ratcheting up of the trade row between the U.S. and China also kept investors on edge after U.S. President Donald Trump announced that the U.S. would be proceeding with $50 billion worth of tariffs on Chinese imports.
Meanwhile, EU exemptions on U.S. tariffs are due to expire this Friday.
On the economic front, German inflation came in stronger than expected on Wednesday, adding to the problems facing the European Central Bank as it debates unwinding its stimulus program.
The euro was higher against the yen, with EURJPY climbing 0.73% to 126.41, off Tuesday’s lows of 125.06, a level not seen since late June.
The euro also gained ground against the Swiss franc, with EURCHF up 0.4% to 1.1484 after falling 1% on Tuesday.
The dollar was also higher against the yen, with USDJPY last at 108.88, recovering from the five-month lows of 108.10 hit in the previous session as risk aversion boosted the Japanese currency.
Elsewhere, the pound pushed higher, with GBPUSD adding on 0.26% to trade at 1.3285 after hitting a six-month low of 1.3203 on Tuesday, pressured lower by political risk in the euro zone.
In the U.S., data on Wednesday showed that the economy slowed slightly more than expected in the first quarter, while another report showed that private sector hiring fell short of expectations in May.