The euro recovered today from 10-month lows after reports that Italy's biggest party would make a renewed attempt to form a coalition government and end months of political turmoil.
An attempt by two anti-establishment parties to form a new government in Italy collapsed at the weekend, raising the prospect of an early election.
Markets feared that election would become a de facto referendum on Italy's use of the euro.
A source close to 5-Star, the single largest party in the new parliament, said the party would try again to form a coalition with the right-wing League.
Without a deal, sources said President Sergio Mattarella could dissolve parliament in the coming days and send Italians back to the polls as early as July 29.
The euro rallied and Italian government bond yields settled below multi-year highs after yesterday's market slide.
A smooth auction of Italian government debt also helped soothe market jitters.
The single currency, which plunged to a 10-month low of $1.1510 yesterday, rose as much as 0.9% to $1.166 today. It remains down 3.5% this month against the dollar.
Analysts said the euro was still at risk of falling.
Meanwhile, sterling also recovered today from the previous day's six-month low, as currencies stabilised after Italy's political crisis sent shockwaves through global financial markets this week.
The British currency edged 0.1% higher at $1.3293 after falling to its lowest levels since November 20 yesterday.
But it weakened against the euro by half a percent, to 87.46 pence, thanks to a broad-based euro bounce.
Data last week showed sterling were still vulnerable to any weak economic data, with markets pricing in about one interest rate increase through 2018.
After major moves yesterday, other foreign exchange markets traded on a quieter note.
The euro had dropped 1% against the safe-haven Swiss franc yesterday in its biggest daily fall since September, but it recovered 0.6% to 1.1508 francs.
Against the yen, the euro rose to 126.285 yen after hitting an 11-month low of 124.62 yen overnight, down from about 131 yen last week.
