The European Commission is set to take the first step on Wednesday towards disciplining Italy over its draft fiscal plan.
But a report that Italian Deputy Prime Minister Matteo Salvini may be open to reviewing the government's 2019 budget helped support Italian government bond markets and the euro on Wednesday.
The newspaper La Stampa said Salvini was ready to reduce the planned spending on a citizen's income and the unwinding of a previous pension reform.
At 03:27 p.m. EST, the euro traded up 0.15 percent at $1.1387. The single currency has risen in six out of the last seven sessions.
"The potential for a further tussle between Rome and Brussels can have an impact on the overall Eurozone economic growth, which will keep the euro under pressure," said Michael McCarthy, chief markets strategist at CMC Markets.
The euro's strength weighed on the dollar index, a measure of performance against six major currencies, which fell 0.12 percent to 96.71. The index gained 0.65 percent the day before.
The dollar has been supported by investors seeking out the safe haven currency on mounting concern about global growth and a U.S.-China trade war.
With another rout in global equities on Tuesday, risk-averse traders sought shelter in the dollar, which climbed from a two-week low hit earlier on Tuesday.
The dollar has been under pressure this week partly from comments by Federal Reserve officials expressing concern about a potential global slowdown. Those comments led some investors to bet the rate-hike cycle was near its end.
The Japanese yen rose 0.29 percent to trade at 113.08.
Despite its safe-haven status, the yen's strength has been muted. Analysts suspect this is because Japanese investors have kept their money in U.S. and foreign markets, rather than bring it home.
The British pound traded down 0.08 percent at $1.2776 after losing 0.5 percent against the dollar on Tuesday. The pound is expected to trade sideways until the market gets more clarity on progress in the Brexit deal.
The Canadian dollar dropped to a four-month low versus the dollar, now trading at 1.324 as the price of crude fell to its lowest level in more than a year. Canada is one of the world's top oil exporters.
Elsewhere, the Australian dollar, often considered a barometer of risk appetite, gained 0.71 percent to trade at $0.7264. The Aussie dollar lost more than 1 percent on Tuesday as global risk sentiment worsened.