By Tom Finn
LONDON (Reuters) - The euro languished near a seven-week low on Tuesday as concerns about a row in the European Union over Italy's budget persisted.
The euro has tended not to budge in response to spikes in Italian bond yields triggered by developments in the dispute, with investors judging that Rome's spending plans will not impact the monetary policy of the European Central Bank.
But the threat of a showdown along with weakness in stock markets worldwide has seen traders who had bet on a fourth quarter euro rebound ditch the single currency.
The euro (EUR=EBS) fell 0.2 percent to $1.1465, close to a seven-week low of $1.146 reached during the previous session.
Italian government bond yields meanwhile edged down from 4-1/2-year highs on hopes that Economy Minister Giovanni Tria will strike a moderate tone when defending the government's budget in parliament.
"In light of current levels of stress in the Italian markets, the question now is how far the Bund/BTP yield gaps can blow out and how this could translate back into the FX market," said Simon Derrick, chief currency strategist at BNY Mellon.
Italy's Deputy Prime Minister on Monday denounced European Commission President Jean-Claude Juncker and Economics Commissioner Pierre Moscovici as enemies of Europe.
Derrick said increasingly it was the dollar rather than the Swiss franc that was benefiting from safe-haven trades in response to the concerns over Italy.
Ten-year Treasury yields resumed their steep climb to seven-year highs on Tuesday. That helped the dollar strengthen across the board with only Japan's yen outperforming among the major currencies.
Against a basket of its rivals (DXY), the greenback rose 0.2 percent to 95.933, not far off a seven-week top of 96.127 hit last week.
The Chinese offshore yuan
At the weekend, China's central bank moved to inject more liquidity into the financial system as policymakers worried about the economic impact of a heated trade row with the United States.
"U.S. yields are rising, whereas the Chinese authorities are trying to push down the Chinese yield. That's typically a stronger dollar/weaker renminbi situation," Masafumi Yamamoto, chief currency strategist at Mizuho Securities, said.
"If the stimulus measures... by the Chinese authorities are regarded as positive for the Chinese economy, then it will support the renminbi," he said. "But at the moment, that's not the case."
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