The euro gave up its early gains and turned negative today after Italy's president set the country on a path to fresh elections.
This has raised concerns that such a route may deliver an even stronger mandate for the country's anti-establishment parties.
Italian President Sergio Mattarella's decision to appoint former IMF official Carlo Cottarelli to form a stopgap administration sets the stage for elections that are likely to be fought over Italy's role in the European Union and the euro zone.
This is a prospect that is unnerving global financial markets.
After climbing more than half a percent in early trading to rise to the day's highs of $1.17285, the single currency fell sharply to trade at the day's lows at $1.1647, down 0.1% on the day.
"Given the stance towards the euro is the single topic financial markets are most sensitive to, the worries towards Italy are probably only starting to increase in the bigger picture," Nordea economist Jan Von Gerich said.
With elections likely to be held in the second half of the year, markets are worried the timing of Italy's elections poses a tricky problem to European Central Bank policymakers who are on track to wind down its bond purchase programme by September.
Analysts believe the ECB may choose a more cautious alternative and extend its bond purchases beyond that month.
The euro has been weakened by the dollar's rally and by widening bond spreads between Italian and German debt, as markets grappled with the prospects of a spendthrift coalition government in Rome comprising the two parties.
Though investors have initially ignored the impact of the new coalition, the events in the last few days have prompted investors to cut their positions in the single currency.
The euro also strengthened by 0.8% against the Swiss franc, rebounding from near three-month lows, but was had halved those gains in midday European trading.
Goldman Sachs strategists said political uncertainty will remain elevated, because the prospect of new elections would remain a drag on the economy.
The euro's weakness meant that the dollar firmed against a basket of rivals and was trading 0.2% up on the day at 94.34 at a fresh six-month high.
Trading volumes were low with Britain and the US, the two main financial centres for foreign exchange trading, both closed for holidays, thus leading to some exaggerated price moves.
Adding to concerns was news that Spanish Prime Minister Mariano Rajoy would face a vote of confidence in his leadership on Friday.
