October 25, 2018 / 1:11 PM / a month ago

Euro reverses gains as ECB's Draghi warns of uncertainties

LONDON (Reuters) - The euro reversed earlier gains and fell on Thursday after European Central Bank chief Mario Draghi said the monetary union remained fragile and failed to assuage concerns about financial instability in Italy.

A rally in the U.S. dollar after a positive opening on Wall Street also exacerbated euro weakness. The greenback rose to new two-month highs against a basket of currencies .DXY.

Draghi had earlier lifted the single currency when he expressed confidence about inflation reaching the bank’s target. The policy statement was light on new details and market moves were small as Draghi stuck to the script for the bank’s plan to end quantitative easing gradually.

But concern about the risk of contagion from surging borrowing costs in Italy - triggered by Rome’s spending plans - loomed large.

“There were no new details on monetary policy but the big question asked was whether the ECB would use its tool kit to respond to problems in Italy? He didn’t answer that question. Markets are slightly unnerved,” said Ulrich Leuchtmann, a currency strategist at Commerzbank.

Draghi said he was confident the European Commission and Rome would come to a compromise over Rome’s budget plans.

Acknowledging the recent weaker momentum in the euro area economy, he also reeled off what he called a “bunch of uncertainties” related to trade protectionism, emerging markets and financial market volatility.

Draghi also said the euro zone monetary union remained “fragile”.

The euro fell to as low as $1.1370, down 0.2 percent on the session, after trading as high as $1.1433. EUR=EBS.

Germany’s 10-year government bond yield gave up earlier rises to trade flat on the day at 0.39 percent after the ECB press conference DE10YT=RR. Some upward momentum also came from U.S. Treasury yields which inched higher as the equity selloff abated.

Italian government bond yields rose five basis points off session lows but were still sharply down on the day. Its 10-year yield was last at 3.53 percent, after earlier falling as low as 3.48 percent IT5YT=RR.

Pan-European stock indexes fell into the red as Draghi spoke before pulling higher when U.S. markets opened.

Reporting by Tom Finn, Virginia Furness and Abhinav Ramnarayan; Writing by Tommy Wilkes; Editing by Alison Williams

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