The euro fell to a six-week low on Tuesday after a senior lawmaker in one of Italy's ruling parties said most of the country's problems would be resolved if it readopted a national currency.
Italy's coalition proposed a budget with a higher-than-expected deficit target, exacerbating tensions with other euro zone leaders and worrying investors who want Rome to bring its debt under control.
The lawmaker, Claudio Borghi, later rowed back on the comments, while Prime Minister Giuseppe Conte said the euro was "unrenounceable".
The single currency dropped as low as $1.1505, its weakest since Aug. 21, before retracing to $1.1552, down 0.2 percent on the day.
"We are dealing with a war of words, with the euro on one side and Italy on the other ... There's a lot of headline risk about," Credit Agricole head of G10 FX Strategy Valentin Marinov said.
Most of the common currency's losses came after Borghi, the economic head of the right-wing League party, said Italy would enjoy more favorable economic conditions outside the euro zone.
The euro has strong technical support at the $1.15 area, which is the 50 percent retracement level of its rally from August to September, said Win Thin, global head of currency strategy at Brown Brothers Harriman in New York. A break below this level could mean further euro weakness to the $1.13 area, Thin said.
The Australian dollar, often viewed as a barometer of risk appetite, fell 0.5 percent to $0.7187 as markets worldwide were spooked by the euro zone concerns. The Reserve Bank of Australia earlier held interest rates at 1.5 percent, a widely expected decision.
As the euro's weakened, the U.S. dollar kept pushing higher even though investor positioning in the greenback looks stretched. The main driver is the U.S. Fed, they signaled they are comfortable with the U.S. economy to continue hiking rates, said Thin.
The U.S. dollar has strengthened against the euro since Wednesday, when the Federal Reserve raised interest rates as expected and said it foresees another rate hike in December, three more next year and one in 2020.
The dollar index rose 0.2 percent to 95.51, after getting as high as 95.744, the highest since August 21.