LONDON • The euro rose to a near two-week high yesterday after assurances from Italy that it would not leave the European Union calmed investors' nerves before a key European Central Bank (ECB) policy meeting.

Italy's economy minister said on Sunday that his new coalition government would not leave the euro or issue securities to pay off companies owed money by the state, a plan investors viewed as a first step towards exiting the bloc.

That sent Italian borrowing costs down sharply yesterday as the euro rallied half a per cent to US$1.1816 towards a two-week high of US$1.1840 touched last Thursday.

"The Italy comments calmed fears but let's wait for the government's policy actions this summer. That will decide the market's direction," said MUFG currency strategist Lee Hardman.

Investors are raising their bets that the ECB will signal at a policy meeting on Thursday a winding down of its vast bond-buying programme by the year end, following a flurry of hawkish comments by officials last week.

The euro bounced despite heightened worries about a global trade war following a spat at the Group of Seven (G-7) summit in Canada between US President Donald Trump and other leaders over automobile tariffs and other issues.

The Mexican peso and Canadian dollar, which has been dogged by fears that Mr Trump may scrap the North American Free Trade Agreement, both fell 0.6 per cent. Analysts said the fairly muted reaction in currencies reflected the low expectations markets had for the G-7 summit, despite the fact that the euro is sensitive to the threat of US tariffs on cars.

"The overhang of global trade wars is still very much alive, but the global FX price action this week will be driven by a stream of other key events," said ING currencies analyst Viraj Patel.

Easing Italian political concerns and speculation the ECB will announce on Thursday when it will unwind its bond-buying programme put the dollar under pressure last week as the euro bounced back from 10-month lows.

Before the ECB meeting, the US Federal Reserve is almost unanimously expected to raise interest rates for the second time this year tomorrow.

The market's focus will be on the Fed's projection on the path of future interest rates. Elsewhere, the Swiss franc weakened nearly 0.3 per cent to 1.162 francs to the euro after voters rejected a plan to transform Switzerland's financial landscape.

A Sovereign Money initiative barring commercial banks from electronically creating money when they lend was rejected by more than three-quarters of voters in a referendum on Sunday.

REUTERS