* Graphic: World FX rates in 2018

By Saikat Chatterjee

LONDON, Oct 8 (Reuters) – The euro fell across the board on
Monday, posting its biggest drop against the Swiss franc since
early September as a spat between Rome and the European Union
over Italy’s budget plans forced a spike in Italian bond yields.

The single currency has been relatively impervious to such spikes in recent weeks as concern over Italy’s budget has dominated headlines.

But a combination of a weakness in stock markets worldwide
and the widening gap between core European and U.S. bond yields
pushed investors who had bet on a fourth quarter euro rebound to
dump the single currency.

"The Italian situation is an excuse for some investors who
had been expecting a rebound in the last few weeks of the year
as recent data out of Europe has hardly been supportive," State
Street Global Markets head of macro strategy Timothy Graf said.

Adding to market concerns, Italian Deputy Prime Minister
Matteo Salvini, speaking at a media conference with French
far-right leader Marine Le Pen, denounced European Commission
President Jean-Claude Juncker and Economics Commissioner Pierre
Moscovici as enemies of Europe. The single currency fell nearly half a percent against the
dollar to $1.1468 and not far from a more-than
one-year low of $1.1355 hit in mid-August.

Against the Swiss franc, the euro plunged half
a percent and it fell 0.7 percent against the
Japanese yen.

BIGGER MARGIN

Struggling European economic data, particularly on the
inflation front, has stood in sharp contrast with data out of
the U.S. in recent weeks, prompting hedge funds to whittle down
their long positions on the euro to their lowest for nearly
1-1/2 years.

The euro’s losses translated into gains for the dollar.
Against a basket of its rivals the greenback rose 0.4 percent to 95.99, edging towards a 14-month high of 96.991 hit
in mid-August.

"The dollar has been supported by some strong data but with
the market already long dollars at these levels, new data has to
surprise investors by a bigger margin to push it higher," Credit
Agricole FX strategist Manuel Oliveri said.

The dollar climbed half a percent last week, marking its
second consecutive week of gains as hedge funds ramped up their
dollar holdings by $3.4 billion to $28.7 billion, the largest
rise since end-December 2016, according to latest data.

Moves were limited by a lack of liquidity with Japan and the
U.S. bond market closed for a holiday. A sudden and steep rise
in Treasury yields had underpinned the dollar for much of last
week.

Yields on 10-year Treasuries hit a seven-year
peak on Friday as data showed the unemployment rate falling to
its lowest since 1969. The big focus for dollar bulls this week will be the release
of U.S. CPI data on Thursday. Markets expect a 0.2 percent
increase on a monthly basis in September, similar to last month
and a bigger increase will bolster U.S. rate hike bets in 2019. Sterling fell 0.7 percent to $1.3034 , wiping out
all of its gains last week, as markets focused on any
substantial breakthrough in Brexit negotiations as Britain moves
nearer to an exit deal with the European Union.

EU Brexit negotiators believe a deal with Britain on leaving
the bloc is "very close", sources said, in a sign that a
compromise on a major sticking point – the future Irish border –
might be in the making.

(Reporting by Saikat Chatterjee
Editing by Louise Ireland)

Reuters Messaging: saikat.chatterjee.reuters.com@reuters.net))

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