* Euro reverses gains after Italian newspaper reports
* Dollar rallies, largely unmoved by Fed rate hike
* Australian dollar hit hard; emerging currencies rally
* Graphic: World FX rates in 2018 tmsnrt.rs/2egbfVh (Adds quote, details, updates prices)
By Tommy Wilkes
LONDON, Sept 27 (Reuters) - The euro fell on Thursday on media reports that an Italian budget meeting was likely to be delayed, spooking traders concerned that the ruling parties will push for a bigger deficit target in the euro zone’s third-largest economy.
Political wrangling over the budget in heavily indebted Italy has overshadowed a recent revival in the euro’s fortunes against the dollar.
Italian daily La Stampa said Economy Minister Giovanni Tria “was ready to leave,” before a spokeswoman for the ministry denied that the minister planned to quit.
Market analysts attributed the euro’s drop to a report by the Corriere della Serra that the budget meeting scheduled for 1600 GMT was likely to be delayed.
Prime Minister Giuseppe Conte’s office denied the cabinet meeting would be delayed but with Italy’s new government struggling to contain the battle over fiscal policy, investors dumped the euro.
The currency fell half a percent to as low as $1.1685 , its weakest since Sept. 20, before recovering somewhat to trade at $1.1710.
“There is concern the parties will push for a bigger deficit target,” said Alvin Tan, an FX strategist at Societe Generale.
He said Tria’s reported willingness to accept a deficit target of 2 percent of economic output would be the “threshold” at which the market would judge new proposals.
Thanks to the euro’s decline, the dollar added to its modest overnight gains following the Federal Reserve’s interest rate hike. The dollar index rose 0.4 percent to 94.522.
The index had scaled a 13-month high in mid-August, drawing safe-haven demand as trade-related tensions buffeted riskier currencies. The index has since fallen about 2.8 percent as investors become less concerned about the U.S.-China trade conflict impacting global growth.
The U.S. Federal Reserve, as expected, raised rates for the third time in 2018. The central bank still foresees another rate hike in December, three more next year, and one increase in 2020.
It also dropped a reference in its statement to the word “accommodative”, although Fed Chairman Jerome Powell later said policy was still accommodative.
Long-term U.S. Treasury yields declined following the Fed’s tightening, pulling back from four-month highs of 3.11 percent scaled earlier in the week, with some investors thought to have wagered the Fed would hint at faster monetary tightening.
“There’s a limit to how much stronger the dollar can be,” said Guy Miller, Head of Macroeconomics at Zurich Insurance, pointing to the extent to which Fed tightening is already priced in and his prediction that the U.S. economy would slip into recession in 2020.
The Australian dollar, seen as a barometer of global investor risk appetite and Chinese demand for goods, fell 0.4 percent to $0.7226, its lowest since Sept. 19 and close to its 2-1/2 year lows of $0.7085 touched earlier this month.
Emerging market currencies such as the Mexican peso and South Africa’s rand, sent lower by the dollar’s rally in recent month, strengthened, relieved that the Fed’s projected path of rate increases were in line with expectations. (Reporting by Tommy Wilkes; Additional reporting by Shinichi Saoshiro in TOKYO; Editing by Hugh Lawson and Jon Boyle)