"At these levels, I think the dollar is almost priced to perfection and we think the euro should see a rebound from later this year", said Paul Baird, head of fixed income at Newton Asset Management, a subsidiary of BNY Mellon which manages $49.8 billion in assets globally.
European markets fell sharply Tuesday, especially in Italy, Greece and Spain, and US stocks also sustained losses. The two-year yield more than doubled, from under 1 percent to 2.2 percent.
CNBC said that sources to some of Italy's main parties said there was now a chance that President Sergio Mattarella could dissolve parliament in the coming days and send Italians back to the polls as early as July 29. The decrease in bond yields is hurting banks.
Italy hosted the European Union's founding Treaty of Rome 60 years ago, but the once enthusiastically pro-EU Italians have progressively become disenchanted with Europe, blaming its fiscal rules for two decades of economic stagnation. Italy has a declining population and rising levels of debt. Italy has the heaviest debt load in the eurozone outside Greece, worth 132 percent of annual economic output.
Conte, a little-known 53-year-old law professor, is backed by the 5-Star Movement which grew out of a grassroots protest network, and the right-wing League, which has issued a budget-busting agenda of sweeping tax cuts and higher welfare spending.
But, he added, "Completely dismissing the risk that Italy poses would be an unwise move, especially given how the next election may play out and the prospect of a stronger eurosceptic position". Italian government bonds also sold off sharply, sending yields up to 3.1%, up from 1.8% on May 1, and raising the borrowing costs of the indebted government. Banks plunged as Wall Street expected they would earn thinner profits.
The Nasdaq composite fell 37.26 points, or 0.5 percent, to 7,396.59. "And despite all the doom and gloom prophesies, the Italian political mind-bender ended up being little more than a tempest in an espresso cup!" The sharp move higher reflects weakening confidence among investors in Italy's government.
In Italy's case, it is not showing any change and Italian banks, like their peers in large euro zone countries, are still paying a negative interest rate - that is, they are actually getting paid - to borrow against collateral. "One way or the other, things can potentially come to a head fast in an acute crisis". "The impact of the contagion from Italy is asymmetrical across the euro zone".
THE QUOTE: "The markets are looking much more constructive to end the week than they did to start, and with trade wars still lingering, that is saying a lot", Stephen Innes of Oanda said in a commentary. That means any default would hit the governments constituents as hard as foreign investors.
The European Central Bank does not see a need to react for now, however, because key financial indicators have yet to show signs of acute stress.