NEW YORK - The U.S. dollar and stocks gained on Friday, but Italy's government bonds, European stock markets and the euro were slammed by deepening worries about the Italian budget and its new higher-than-expected deficit target.
Rome on Thursday targeted a budget deficit of 2.4 percent of gross domestic product (GDP) for the next three years, marking a victory for party chiefs over economy minister Giovanni Tria, an unaffiliated technocrat.
The deficit, though within the prescribed EU limit of 3 percent of GDP, is a concern for investors who fear the anti-establishment government is not committed to tackling its huge debt load. Italy's debt-to-GDP ratio stands at about 130 percent, the highest in the euro zone behind Greece.
The pan-European FTSEurofirst 300 index lost 0.75 percent. Germany's DAX was last down 1.52 percent.
Shares in Italian banks fell as much as 8.5 percent and closed 7.26 percent lower. [.EU]
Italian government bonds were set for their worst day since a brutal May 29 sell-off, up 34-42 basis points across the curve.
The euro fell 0.19 percent to $1.1617. MSCI's gauge of stocks across the globe shed 0.12 percent.
The picture was rosier on Wall Street, where tech shares also got a big boost from Nvidia Corp, which rose after Evercore raised the chipmaker's price target to $400.
The Dow Jones Industrial Average rose 43.24 points, or 0.16 percent, to 26,483.17, the S&P 500 gained 3.12 points, or 0.11 percent, to 2,917.12 and the Nasdaq Composite added 7.18 points, or 0.09 percent, to 8,049.14.
In Asia earlier, Japan's Nikkei stock index raced to a 27-year high on renewed optimism over the global economy and hopes of a boost to its exporters' earnings from a weaker yen. The index closed 1.36 percent higher.
KING DOLLAR REIGNS
The dollar index rose 0.17 percent.
"The U.S. dollar remains a metaphorical rock in a sea of troubles," said Karl Schamotta, director of global product and market strategy at Cambridge Global Payments in Toronto.
"The growth outlook for other Group of 10 countries and the emerging markets remains uncertain, and increased confidence in the forces compelling the Federal Reserve to hike rates next year is helping to lift the U.S. dollar against its counterparts," he added.
After the Federal Reserve raised interest rates on Wednesday - the third increase this year - Fed Chair Jerome Powell said that the United States does not face a large chance of a recession in the next two years and the central bank plans to keep raising rates gradually.
Benchmark 10-year notes last rose 4/32 in price to yield 3.0426 percent, from 3.055 percent late on Thursday.
"We are seeing safety trade due to the Italian crisis, people are coming in and buying U.S. paper and the dollar," said Peter Cardillo, chief market economist at Spartan Capital Securities in New York.
Energy stocks also got a boost from oil prices, with Brent crude climbing to a fresh four-year high as U.S. sanctions on Tehran squeezed Iranian crude exports.
U.S. crude rose 1.58 percent to $73.26 per barrel and Brent was last at $82.89, up 1.86 percent on the day.