Euro dips after EU cuts Italian outlook; dollar up before Fed meeting

LONDON: The euro fell on Thursday after the European Commission cut its forecasts for Italian growth, adding to investor concerns about the euro-zone's third-largest member's debts and economic outlook.

While the euro dipped, the dollar extended its recovery following a sigh of relief across markets after the U.S. midterm election results, and as investors turned their attention towards the Federal Reserve's policy meeting later on Thursday.

The European Commission forecast the Italian economy would grow more slowly in the next two years than Rome thinks, making government budget deficits much higher than assumed by Italy, and supporting the Commission's view that Italy's 2019 draft budget breaks European Union fiscal rules.

The announcement sent the euro, which was up marginally on the day, into negative territory. It traded 0.2 percent lower at $1.1404 by 1135 GMT, at the day's lows.

"The Italian situation continues to pressure the euro," said Alvin Tan, an FX Strategist at Societe Generale.

Tan said that adding to euro weakness was the dollar's rebound thanks to U.S. midterm election results that "were in line with expectations and mean the Fed can go on its way" in raising interest rates.

Democrats won control of the House of Representatives in the vote while the Republicans cemented their majority in the Senate, resulting in a split U.S. Congress.

The dollar pulled further away from 2-1/2 week lows hit on Wednesday.

The Fed is expected to keep interest rates on hold but signal further tightening in December and 2019.

The dollar index nudged up 0.3 percent to 96.251. It had hit as low as 95.678 on Wednesday.

"Over the coming weeks and months the market will have to draw its own conclusion about how far the hiking cycle in the U.S. will go, based on the continuation of the U.S. fiscal and trade policy under the new conditions in Congress and the economic data," Commerzbank analysts said in a note.

"That means that in particular positive wage, price and labour market data might provide support for the dollar."

More broadly, analysts said foreign exchange traders were treading cautiously and looking for their next cue on the strength of the global economy, despite world stocks racking up their longest winning streak of 2018 on Thursday.

The dollar gained 0.2 versus the Japanese yen to 113.72 . The dollar has gained over the past week versus the yen due to the diverging monetary policies of the U.S. Fed and the Bank of Japan.

The New Zealand dollar slipped slightly, by 0.1 percent to $0.6774, but was little moved by its central bank keeping rates on hold at 1.75 percent on Thursday.

The Australian dollar built on recent gains to trade at $0.7284, up 0.2 percent and within touching distance of a six-week high.

The Aussie was cheered by stronger than expected trade data out of China, Australia's largest trading partner.