November 21, 2018 / 1:12 AM / 24 days ago

Dollar weakens as risk appetite turns higher

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

U.S. Dollar banknotes are seen in this photo illustration taken February 12, 2018. REUTERS/Jose Luis Gonzalez/Illustration

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

Karl Schamotta, chief market strategist at Cambridge Global Payments in Toronto, said that despite gains in stocks, overall risk appetite remains “extremely suppressed after several false dawns in the last two weeks.”

U.S. data did not help the dollar either.

New orders for key U.S.-made capital goods were unexpectedly unchanged in October, while shipments rebounded modestly. Other data on Wednesday showed the number of Americans filing applications for unemployment benefits rose to a more than four-month high last week.

U.S. home sales rose slightly in October and snapped a six-month streak of drops but ongoing weakness in the housing market led a national realtors association to ask the Federal Reserve to take a break from hiking interest rates.

Schamotta said the data suggests that the performance gap between the United States and other major economies could begin to narrow into the winter months.

The reports also “provided the strongest evidence yet that the impact of the Trump administration’s tax cut package was largely temporary – and that trade-related uncertainties could have longer-term effects.

In afternoon trading, the dollar index was down 0.2 percent at 96.685 .DXY.

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.

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.

The single European currency was last up 0.2 percent at $1.1390 EUR=.

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 Italy.

The safe-haven yen JPY=D3 fell against the dollar, which rose 0.3 percent to 113.08.

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

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