Investing.com - The euro climbed against the dollar on Monday, rebounding from 20-month lows as investors shook off Italian voters’ rejection of constitutional reform and the subsequent resignation of Prime Minister Matteo Renzi.
EUR/USD was last at 1.0705, up 0.41% at the highest levels since mid-November, after falling as low as 1.0507 earlier, the weakest since March 2015.
The single currency initially slumped after Italian voters rejected a referendum on constitutional changes backed by the government, prompting Prime Minister Matteo Renzi to step down.
Concerns over the financial health of the Italy’s ailing banking sector mounted amid fears that Renzi’s bank bailout program could be scrapped.
Italy’s banks are weighed down by bad loans and could possibly require a full-blown bailout from the European Central Bank.
Italy’s third-largest lender Monte dei Paschi di Sienas is in the midst of a complex operation to shed €28 billion in bad loans and raise €5 billion as part of a rescue plan.
But the euro quickly recovered as the referendum outcome had been largely priced in by markets.
Markets were also reassured after the ECB said last week that it was prepared to temporarily step up purchases of Italian government bonds should the referendum results drive up borrowing costs.
European stock markets also retraced early losses as investors bet against immediate elections in Italy.
EUR/JPY was last at 122.46 after falling as low as 120.16 earlier, while EUR/GBP recovered to trade at 0.8409 after falling to 0.8305 earlier, a level not seen since July.
The U.S. dollar index, which measures the greenback’s strength against a trade-weighted basket of six major currencies, slid 0.16% to 100.60 at the stronger euro weighed.
The dollar gained ground against the yen, with USD/JPY rising 0.76% to 114.37, re-approaching the nine-and-a-half month high of 114.83 touched last week.
Demand for the greenback continued to be underpinned after Friday’s solid U.S. jobs report for November cemented expectations for an interest rate hike by the Federal Reserve this month.
According to Investing.com's Fed Rate Monitor Tool, 100% of traders expect the Fed to raise interest rates next week.