FOREX-Euro inches higher but vulnerable to Italy auction
* Italian debt sale to gauge investor confidence
* Poor auction demand could push euro below $1.30
* Bernanke expected to reiterate support for Fed stimulus
By Nia Williams
LONDON, Feb 27 (Reuters) - The euro edged away from a seven-week low against the dollar on Wednesday but looked vulnerable to the risk an inconclusive Italian election will sour demand for the country's bonds at an auction later.
Strategists said higher borrowing costs at the sale of five- and 10-year bonds would fuel concerns the euro zone debt crisis could re-emerge in the region's third largest economy and could push the euro lower.
Even if the auction goes well, demand for the single currency could be muted for weeks as uneasy investors wait to see whether Italian politicians can form a coalition, or will call fresh elections.
The euro was last up 0.2 percent on the day at $1.3086, still close to Tuesday's low of $1.3018, which was its weakest since Jan. 7. The single currency has shed about 5 percent since peaking at a 15-month high of $1.3711 on Feb. 1.
"This auction will put to the test current market sentiment. There's a chance it will disappoint and if that's true the euro will break through $1.30," said Carolin Hecht, currency strategist at Commerzbank.
"Even if the auction runs OK the euro should continue to trade in a subdued, sideways mood."
Technical strategists said there would be support for the euro at this year's low of $1.2998, and below that around the Dec. 7 low of $1.2876.
Investors were also looking ahead to U.S. Federal Reserve Chairman Ben Bernanke's testimony to the House Financial Services Committee later on Wednesday.
"Italian uncertainties weigh on the global market, so most (investors) would like to wait, and some of them would also like to check what Bernanke says," said Masashi Murata, FX strategist at Brown Brothers Harriman in Tokyo.
Market players said Bernanke was expected to reiterate comments from Tuesday, when he said the central bank would keep buying bonds for a while, helping alleviate some market concerns about an early end to the Fed's easing programme.
Bernanke's comments curbed demand for the dollar, which tends to be weakened by loose U.S. monetary policy.
The yen firmed against the dollar and euro, benefiting from being seen as a safe-haven currency by investors nervous about the political deadlock in Italy.
The dollar dipped 0.2 percent on the day to 91.75 yen but managed to hold above a one-month low of 90.85 touched on Monday. The euro stood at 120.11, close to flat on the day and holding above Monday's one-month low of 118.74 yen.
Market players said the Japanese currency was caught between investors who had previously sold it to take profit, and those who saw the dip in the dollar as a buying opportunity.
The yen has been the worst performing major currency so far this year as investors bet on more aggressive policies from the Bank of Japan to beat deflation, and investors have positioned for more monetary stimulus.
The dollar hit a 33-month high of 94.77 yen on Monday.
Renewed euro zone concerns took a toll on growth-correlated commodity currencies. The Australian dollar fell 0.3 percent to at $1.0197, bringing into focus the October low of $1.0149.
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