FOREX-Euro dips after Italian auction, seen vulnerable
* Borrowing costs rise at Italian bond auction
* Strategists see scope for euro to fall below $1.30
* Bernanke expected to reiterate support for Fed stimulus
By Nia Williams
LONDON, Feb 27 (Reuters) - The euro pared gains against the dollar on Wednesday to trade near a seven-week low after Italian borrowing costs rose at the country's first debt auction since an inconclusive election.
Italian 10-year debt costs climbed more than half a percentage point at the auction, raising concerns the euro zone debt crisis could re-emerge in the region's third largest economy.
The single currency fell to $1.3079 after the Italian auction from a session high of $1.3123, that was hit after a survey showed euro zone economic and business confidence improved for a fourth straight month in February.
It was last up 0.2 percent on the day at $1.3086.
The euro held above Tuesday's low of $1.3018, which was its weakest since Jan. 7, but strategists further losses were likely as uneasy investors wait to see whether Italian politicians can form a coalition, or will call fresh elections.
"Euro weakness is going to return and I think by the end of the day we will see a drop through yesterday's lows," said Adam Myers, senior FX strategist at Credit Agricole.
"A grand coalition is not going to be announced any time soon and until we get any sign of a new election uncertainty is going to continue."
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.
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 fell 0.4 percent on the day to 91.62 yen but managed to hold above a one-month low of 90.85 touched on Monday. The euro stood at 120.01, down 0.1 percent on the day and holding above Monday's one-month low of 118.74 yen.
Despite this week's gains, the yen has been one of 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 positioned for more monetary stimulus.
The dollar hit a 33-month high of 94.77 yen on Monday.
Strategists said the yen's current rebound was likely to be short-lived given demand among Japanese investors for higher-yielding foreign assets.
"The yen weakening trend will resume because on the Japanese side of the equation the incentive to look for better returns elsewhere is still there," said Ian Stannard, head of European FX strategy at Morgan Stanley.
Morgan Stanley are looking for a move towards 95 yen.
Renewed euro zone concerns took a toll on growth-correlated commodity currencies. The Australian dollar fell 0.4 percent to a 4-1/2 month low of $1.0184, bringing into focus the October low of $1.0149.
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