The euro yesterday fell to the weakest level since March last year as former Italian prime minister Matteo Renzi resigned after conceding defeat in the nation’s constitutional referendum.
The single currency dropped against all its 16 major counterparts as the referendum on Renzi’s plans to rein in the power of the Italian Senate was defeated by 60 percent to 40 percent, with almost all the vote counted.
The euro pared losses following Renzi’s speech, while the yen erased an earlier advance against the US dollar.
“Markets tend to react much faster to changes of environment now,” said Yannick Naud, head of fixed income at Banque Audi (Suisse) SA in Geneva. “There is now a possibility of the euro reaching parity to the [US] dollar. Maybe not right away, but it is a possibility if there is certainty regarding new elections.”
The euro dropped 1.1 percent to US$1.0548 as of 1:36pm in Tokyo after falling as much as 1.5 percent to US$1.0506, the lowest since March 16 last year.
The result is the latest in a series of votes that have roiled financial markets this year, following Britain’s vote to leave the EU in June and Donald Trump’s victory in last month’s US presidential election.
Still, with a “No” vote largely expected, the initial market reaction is relatively muted compared with those events — the pound fell by more than 10 percent as it became clear the UK had voted for Brexit, while the US dollar swung wildly in the hours following Trump’s win.
While the referendum has raised concerns over Italy’s future in the eurozone, the nation’s political and legal system mean a “No” vote is unlikely to trigger a quick exit.
“If the referendum is rejected, this is not the end of the world,” London-based Barclays PLC economist Fabio Fois said before the vote. “Bicameralism will remain, but what really matters is the government attitude to press ahead with reforms.”
A rejection of Renzi’s reform means Italy’s government bonds, which have been the eurozone’s worst performers in the past six months, might drop. The extra yield demanded by investors for owning the nation’s 10-year bonds instead of German bunds on Monday last week surged to the most since June last year. It pared that increase last week, while Italian stocks gained.
Before the vote, some investors said they saw the currency, rather than the nation’s bonds, as the best way to play the referendum, as the European Central Bank’s bond buying plan provides a source of support for the fixed-income securities.
Italy’s benchmark FTSE MIB Index of shares has dropped about 20 percent this year.
While Renzi’s concession initially roiled other currencies, the fallout was limited. The yen erased a gained of as much as 0.6 percent against the US dollar, while the Australian dollar and Mexican peso pared losses. US Treasuries gained for a second day, with the benchmark 10-year yield falling 4 basis points to 2.35 percent.
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