Dollar Index Soars as Euro Tanks on Italian Political Risks

The U.S. Dollar hit its highest level since July 6, 2017 against a basket of currencies on Tuesday as most investors returned to work after the long U.S. and U.K. holiday week-end. Political risks in Italy drove the Euro to a multi-month low against the U.S. Dollar. Safe-haven buying because of these same risks underpinned the Japanese Yen against the U.S. Dollar.

June U.S. Dollar Index futures settled at 94.789, up 0.659 or +0.70%.

The Euro, which makes up about 57% of the U.S. Dollar Index fell sharply as Italy’s political crisis deepened, raising the likelihood of an early election.

CNBC said that sources to some of Italy’s main parties said there was now a chance that President Sergio Mattarella could dissolve parliament in the coming days and send Italians back to the polls as early as July 29.

Investors aren’t satisfied with waiting that long to resolve the political issues, they have been dumping Italian bonds for several days. The 10-year Italian government bond yield jumped to 3.19 percent as bond prices fell, versus just under 2 percent around two weeks ago.

Additionally, the two-year debt yield jumped to 2.71 percent overnight from 0.84 percent the day before.

Traders are saying the price action suggests investors are pricing in default risk. If the selling intensifies then this will mean they are also considering an early election leading to a victory of euroskeptics and an eventual exit from the Euro Zone. A euroskeptic is a person who is opposed to increasing the powers of the European Union.

U.S. Economic Reports

In U.S. economic news, the S&P/CS Composite-20 Home Price Index came in slightly better than expected at 6.8%. This matched the previous read, but came in higher than the 6.5% estimate.

Conference Board Consumer Confidence was 128.0, slightly below the 128.2 estimate. The previous report was revised lower to 125.6.

U.S. Stock Market

The major U.S. stock indexes tanked on Tuesday amid political turmoil in Italy that drove the Euro to a multi-month low and renewed concerns over a trade war between the United States and China. Bank stocks took the brunt of the selling pressure.

Tuesday’s sell-off was the third consecutive session of lower closes for the Dow and the S&P 500, both of which suffered their worst day on a percentage basis since April 24.

U.S. Treasurys

The political turmoil in Italy and Spain triggered a flight-to-safety rally into U.S. Treasury instruments. This drove down yields lower, weakening the U.S. Dollar against the Japanese Yen.

The yield on the benchmark 10-year Treasury note broke below 2.8 percent on Tuesday, down from highs above 3.13 percent earlier this month. The yield on the 30-year Treasury bond, meanwhile, was down at 3.006 percent.