Investing.com - The euro fell against the firmer dollar on Tuesday as fears over the health of Italy’s banking system weighed in the run-up to Sunday’s Italian constitutional referendum.
EUR/USD was last at 1.0575, down 0.36% for the day. The single currency was also weaker against the pound, with EUR/GBP down 0.85% at 0.8478.
Fears over the financial health of the Italy’s banking sector mounted as Italian voters prepared to head to the polls on Sunday to vote on constitutional reforms.
Many analysts believe voters could reject Prime Minister Matteo Renzi’s attempts to curb the power of the Senate.
A ‘No’ vote could trigger Renzi’s resignation and potentially clear the way for the Eurosceptic Five Star Movement to take power.
Up to eight Italian banks could fail if Renzi resigns as his bank bailout program would likely be scrapped.
Italy’s banks are weighed down by bad loans and could possibly require a full-blown bailout from the European Central Bank.
Italian lender Monte dei Paschi di Siena 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.
On Tuesday, the ECB said it is ready to temporarily step up purchases of Italian government bonds should Sunday’s referendum results drive up borrowing costs.
Separately, a report on Tuesday showed that global investors are becoming more concerned that the euro zone could break up.
The Frankfurt-based Sentix research group said that nearly 20% of investors expect Italy to leave the euro zone in the next 12 months, the highest level since they started polling four years ago.
Demand for the dollar continued to be underpinned, with the U.S. dollar index, which measures the greenback’s strength against a trade-weighted basket of six major currencies, last at 101.53.
Investors were waiting on a raft of U.S. data, including a second look at third quarter growth later in the day, ISM manufacturing data on Thursday and Friday’s nonfarm payrolls report for November.
Upbeat data would further feed into expectations for an interest rate hike by the Federal Reserve next month.
According to Investing.com's Fed Rate Monitor Tool, 100% of traders expect the Fed to raise interest rates at its policy meeting in December.