FOREX-Euro stuck near two-month low as EU challenges Italy budget
* Euro under pressure amid EU-Italy stand-off
* Dollar index inches higher
* Sterling rises on Brexit hopes
* Graphic: World FX rates in 2018 (Updates prices)
By Tom Finn
LONDON, Oct 19 (Reuters) - The euro fell towards a two-monthlow on Friday after the European Union criticised Italy'sspending plans, raising fresh concern about a conflict withinthe common currency zone.
Political wrangling over the budget in heavily indebtedItaly has seen the euro weaken over 1 percent versus the dollarthis week.
The European Commision on Thursday sent Rome a lettercalling a draft budget an "unprecedented" breach of EU fiscalrules, the first step of a procedure that could end withBrussels rejecting the budget and fining Italy.
The single currency fell to an intra-day low of $1.1433 close to a two-month low of $1.1432 hit on October 9.At 1100 GMT it traded 0.1 percent up on the day at $1.1464.
Italy is the third-largest economy of the 19-country eurozone, and a crisis there could unsettle the entire bloc.
The gap between Italian and German 10-year bond yieldsreached its widest in 5 1/2 years after news of the Commissionletter broke.
"The euro is already suffering considerably, and that couldget worse if the crisis really gets going, as thedollar is now providing attractive yields," said UlrichLeuchtmann, a currency strategist at Commerzbank.
Analysts at MUFG said that if BTP yields moved notablyhigher "correlations could well strengthen and this wouldprovide further downside pressure for the euro".
Investors have been pricing in the possibility that thetussle between Italy and the European Union will force theEuropean Central Bank to be more cautious in removing stimulus.
Euro zone money markets are now not fully pricing in aninterest rate rise from the ECB until October 2019. Earlier thisweek, they were projecting an increase nextSeptember .
The dollar index , a gauge of its value against majorpeers, traded flat at 95.9 on Friday, close to a two-month highof 96.155.
Meanwhile, the British pound rose after EU negotiator MichelBarnier said a Brexit deal with the United Kingdom was 90percent done but that hurdles remained.
Sterling rose to a day's high versus the dollar of $1.3038 , trading broadly flat. It also strengthened 0.1 percentagainst the euro to 87.9 pence.
The Japanese yen weakened 0.2 percent versus thedollar on Friday, to trade at 112.37.
A global risk-off mood has prevailed this week amid tensionbetween the U.S. and Saudi Arabia, Italy's budget woes andU.S-Sino trade conflict.
China's economic growth in the third quarter slowed to 6.5percent, its weakest since 2009 and below expectations, as acampaign to tackle debt risks and the trade war with the UnitedStates weighed on the economy.
The yuan changed hands at 6.9341 on Friday, tradingdown 0.1 percent versus the dollar, close to a two-month low.
"Expectations have increased for the Chinese yuan todepreciate towards its psychological 7 level against the USD,"said Eugene Leow, rates strategist at DBS in a note.
(editing by Larry King/Keith Weir)
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