October 25, 2018 / 4:20 PM / a year ago

FOREX-Euro at 2-month low as ECB plans tightening despite 'uncertainties'

* Graphic: World FX rates in 2018 tmsnrt.rs/2egbfVh (Recasts with euro at 2-month low, updates prices)

By Kate Duguid

NEW YORK, Oct 25 (Reuters) - The euro fell to a two-month low on Thursday after European Central Bank President Mario Draghi said the bank would pursue its tightening policy in spite of fears about the monetary union’s economic and political future.

The ECB reaffirmed that its 2.6 trillion euro ($2.97 trillion) asset purchase program will end this year and that interest rates could rise after next summer. The policy guidance has been consistent since June, even though the economic outlook has darkened while political turmoil in Italy looms over the currency bloc.

Although Draghi said he was confident the European Commission and Rome would reach a compromise over Italy’s budget plans, he failed to allay concerns about the risk of contagion from surging borrowing costs.

The single currency rose immediately after the central bank’s rates announcement, then began to sell off “once Draghi started speaking again and highlighted the risks around Italy and Brexit,” said John Doyle, vice president of dealing and trading at Tempus, Inc.

Doyle said the euro’s decline was the primary reason for Thursday’s jump in the dollar index, which measures the greenback’s performance against a basket of six major currencies. It was amplified, however, by the rise in U.S. stocks at the opening bell after a sell-off on Wednesday, which pushed the Nasdaq into correction territory and erased all the year’s gains on the S&P 500 and the Dow.

Against the dollar, the euro fell to $1.1361, its lowest since Aug. 16. The single currency was last down 13 basis points on the day. The dollar index hit a two-month high of 96.681, last up 27 basis points from the open.

Sterling hit a six-week bottom of $1.281 after Draghi said the longer Brexit talks drag on, the more the private sector must prepare for the possibility that Britain could exit the European Union with no deal on future relations.

Elsewhere, the Japanese yen weakened, although the Swiss franc, a rival safe-haven currency, gained.

The yen weakened to as much as 112.63 against the dollar, but nevertheless remained up 1.7 percent from its 2018 trough hit on Oct. 3.

The Swiss franc spiked against the dollar following the Draghi announcement to trade as high as $1.002 and strengthened by 16 basis points against the euro.

The Australian dollar, often viewed as a bellwether for global risk, rose 0.26 percent to $0.708. However, in a sign that worries about global growth, particularly in China, are beginning to bite, the offshore yuan hit a 22-month low, last at 6.954. (Reporting by Kate Duguid; Editing by David Gregorio and Dan Grebler)

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