Dollar falters as risk appetite increases

NEW YORK (Reuters) - The dollar fell on Wednesday, as risk appetite improved, bolstered by higher stocks and a stronger euro, which was boosted by hopes for a resolution of Italy’s budget.

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Wall Street shares recovered after a steep two-day sell-off, led by a rebound in Apple Inc and other major technology stocks. For two days, U.S. equity losses had bolstered safe-haven currencies such as the dollar, yen, and Swiss franc.

“The melting of risk appetite generated little follow-through, offering risk appetite a pop,” said Mark McCormick, North American head of FX strategy.

Another factor boosting risk appetite was optimism about the Italian budget, even though the European Union rejected Rome’s fiscal plans for failing to comply with euro zone rules.

In mid-morning trading, the dollar index was down 0.2 percent at 96.627.

The euro, the largest component in the dollar index, rose 0.2 percent at $1.1392.

The European Commission took its first step toward disciplining Italy over its draft budget and said the government should face EU action to reduce its deficit.

Still, the euro rallied, especially after Italian Prime Minister Giuseppe Conte expressed concern about the government bond spread and pledged reforms.

The euro spiked early on a report Italian Deputy Prime Minister Matteo Salvini may be open to reviewing the fiscal plan for 2019. Salvini later said he was not open to negotiations over Italy’s deficit target of 2.4 percent of gross domestic product, though other aspects of the budget could be discussed.

“Even if Italy becomes subject to the Excessive Deficit Procedure it may be several weeks before that procedure begins, and Italy will have several months to respond to the concerns raised by the European Union,” said Nick Bennenbroek, currency strategist at Wells Fargo in New York.

“Moreover, at the end of the day, it’s possible that no financial penalties would be imposed, and that any sanction would be only symbolic,” he added.

The euro has risen in six out of the last seven sessions but analysts said the currency remained vulnerable to the political risks emanating from the third-largest economy of the 19-country euro zone.

The dollar has also felt some pressure as Federal Reserve officials this week expressed concern about a potential global slowdown, leading some investors to bet the rate-hike cycle was near its end.

The safe-haven Japanese yen fell against the dollar, which rose 0.3 percent to 113.06.

Reporting by Gertrude Chavez-Dreyfuss in New York; additional reporting by Tom Finn in London; Editing by David Gregorio