* Graphic: World FX rates in 2018 tmsnrt.rs/2egbfVh
By Saikat Chatterjee
LONDON, Oct 8 (Reuters) - The euro fell across the board on Monday, posting its biggest drop against the Swiss franc since early September as a spat between Rome and the European Union over Italy’s budget plans forced a spike in Italian bond yields.
The single currency has been relatively impervious to such spikes in recent weeks as concern over Italy’s budget has dominated headlines.
But a combination of a weakness in stock markets worldwide and the widening gap between core European and U.S. bond yields pushed investors who had bet on a fourth quarter euro rebound to dump the single currency.
“The Italian situation is an excuse for some investors who had been expecting a rebound in the last few weeks of the year as recent data out of Europe has hardly been supportive,” State Street Global Markets head of macro strategy Timothy Graf said.
Adding to market concerns, Italian Deputy Prime Minister Matteo Salvini, speaking at a media conference with French far-right leader Marine Le Pen, denounced European Commission President Jean-Claude Juncker and Economics Commissioner Pierre Moscovici as enemies of Europe.
The single currency fell nearly half a percent against the dollar to $1.1468 and not far from a more-than one-year low of $1.1355 hit in mid-August.
Against the Swiss franc, the euro plunged half a percent and it fell 0.7 percent against the Japanese yen.
Struggling European economic data, particularly on the inflation front, has stood in sharp contrast with data out of the U.S. in recent weeks, prompting hedge funds to whittle down their long positions on the euro to their lowest for nearly 1-1/2 years.
The euro’s losses translated into gains for the dollar. Against a basket of its rivals the greenback rose 0.4 percent to 95.99, edging towards a 14-month high of 96.991 hit in mid-August.
“The dollar has been supported by some strong data but with the market already long dollars at these levels, new data has to surprise investors by a bigger margin to push it higher,” Credit Agricole FX strategist Manuel Oliveri said.
The dollar climbed half a percent last week, marking its second consecutive week of gains as hedge funds ramped up their dollar holdings by $3.4 billion to $28.7 billion, the largest rise since end-December 2016, according to latest data.
Moves were limited by a lack of liquidity with Japan and the U.S. bond market closed for a holiday. A sudden and steep rise in Treasury yields had underpinned the dollar for much of last week.
Yields on 10-year Treasuries hit a seven-year peak on Friday as data showed the unemployment rate falling to its lowest since 1969.
The big focus for dollar bulls this week will be the release of U.S. CPI data on Thursday. Markets expect a 0.2 percent increase on a monthly basis in September, similar to last month and a bigger increase will bolster U.S. rate hike bets in 2019.
Sterling fell 0.7 percent to $1.3034, wiping out all of its gains last week, as markets focused on any substantial breakthrough in Brexit negotiations as Britain moves nearer to an exit deal with the European Union.
EU Brexit negotiators believe a deal with Britain on leaving the bloc is “very close”, sources said, in a sign that a compromise on a major sticking point - the future Irish border - might be in the making.
Reporting by Saikat Chatterjee Editing by Louise Ireland