Euro bounces but Italy, Brexit test nerves

A panel displays the closing Hang Seng Index in Hong Kong

While Shanghai was lifted one percent by regulators' promise to simplify share buybacks, Asian markets broadly weakened following Friday's weak Wall Street close.

The U.S. dollar took flight on Monday, hitting its highest level in about 1 ½-years, as political uncertainties in Europe- Italy's budget dilemma and Brexit-drove the British pound and euro lower against key rivals. Added to that litany is a view that corporate earnings growth has peaked amid rising borrowing costs.

The U.S. dollar index .DXY , which has steadily climbed as the U.S.

USDThe Federal Reserve delivered another unambiguously hawkish assessment of the U.S. economy last Thursday, further raising hopes of an interest rate hike from the central bank when it next meets in December. The euro had hit a six and a half month low versus sterling of 0.8653 yesterday.

The Japanese yen was the only major currency to gain versus the dollar overnight as risk aversion caught hold of investors.

The dollar index .DXY rose 0.62 percent, with the euro down 0.8 percent to $1.1243.

Brent is trading around $71.4 per dollar, off seven-month lows touched last week. The dollar has been preferred over the yen because of the diverging monetary policies of the Fed and the Bank of Japan, which is expected to keep retain its monetary policy ultra-loose for some time. "The yen will now have a greater safe haven pull than the dollar if equities witness a further correction".

That being said, we did see a modest upward revision to the crucial composite PMI number.

Earlier, U.S. stocks rose after White House economic adviser Larry Kudlow said Washington had resumed trade talks with China, calling the development "very positive".

On the Brexit front, hopes for the skeleton of a workable Brexit deal to be presented at the EU's Brexit summit this month, and with UK Prime Minister Theresa May being forced to cancel an emergency Brexit cabinet meeting amidst backlash from within her own parliament, hopes are waning for any progress to be announced before December's meeting as well, and steadily-deflating expectations for a soft-Brexit scenario are going out the window, and taking the Pound's exchange rate with them.

With less than five months before Britain is due to leave the European Union on March 29, negotiations are still stuck over how to prevent a return to a hard border between British-ruled Northern Ireland and European Union member Ireland.

The euro gained 0.1 per cent to trade at $1.1227 on Tuesday, after tumbling more than one per cent versus the dollar on Monday.

In the euro zone, Italy faces a Tuesday deadline to submit a revised budget to the European Union, but its refusal so far to cut the draft deficit sets the stage for a collision with Brussels.

The European Commission rejected Italy's 2019 budget last month, saying it flouted a previous commitment to lower the country's deficit.

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