FOREX-Dollar up on Italy deadlock, ahead of U.S. spending cuts

Thu Feb 28, 2013 10:25am EST

Related Topics

* Concerns about Italian political deadlock weigh on euro

* Focus on U.S. fiscal spending cuts

* Japan nominates Kuroda as next BOJ chief as expected

* U.S. economy barely grows in fourth quarter

By Julie Haviv

NEW YORK, Feb 28 (Reuters) - The dollar rose against the euro and yen on Thursday as investors embraced its safety against the backdrop of a political stalemate in Italy and less than 24 hours before automatic spending cuts are enacted in the United States.

While month-end flows should translate into choppy flows during the session, the euro's upside is seen as limited by concerns political instability will stall Italian economic reforms and reignite the euro zone debt crisis.

Investors fear the uncertain situation in Italy, the euro zone's third-largest economy, could reignite the bloc's crisis, now in its fourth year. The European Central Bank may offer support should the debt crisis take a turn for the worse.

"Investors are worried about Italy whose election stalemate this week left unresolved the country's commitment to economic reforms," said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington D.C.

"On this side of the Atlantic, meanwhile, big U.S. budget cuts could come as soon as Friday," he said.

Positions hardened between U.S. President Barack Obama and Republican congressional leaders over the budget crisis even as they arranged to hold last-ditch talks to prevent harsh automatic spending cuts beginning this week.

U.S. politicians appear to be resigned to the $85 billion in "sequestration" cuts starting on Friday.

"Given past experience, many investors have clung to hopes that Washington might strike an 11th hour deal to avoid the big spending cuts or cobble together a plan in the coming weeks to blunt the impact on the economy," Manimbo said.

The euro last traded at $1.3098, down 0.3 percent on the day, but slightly above the session low $1.3092.

It held above a near eight-week low of $1.3017 hit on Tuesday after inconclusive Italian elections, while reported options barriers ahead of $1.3160 could limit any gains.

Despite wariness over the political situation, some strategists said there would be some support for the euro around these levels as many investors were confident the European Central Bank would step in if the crisis worsened.

"There's a lot of uncertainty out there from people who think Europe is going back to the bad old days, but we don't think that's the case" said Gavin Friend, currency strategist at National Australia Bank.

"Investors are going to be slightly more cautious but there's a chance of a bottom (in the euro) forming here."

Many market players expected the euro to remain range-bound over the next couple of weeks while awaiting more clarity on Italy. Strong support was seen around the 2013 low of $1.2997 hit in early January.

Against the yen, the euro last traded at 120.94 yen, down 0.2 percent on the day, but above a five-week low of 118.74 yen set on Monday.

U.S. DATA WEIGHS

The dollar briefly fell against the yen after data showed the U.S. economy barely grew in the fourth quarter although a slightly better performance in exports and fewer imports led the government to scratch an earlier estimate that showed an economic contraction.

Another report showed a drop in new claims for unemployment benefits last week, adding to a string of data that suggests the economy improved early this year.

Against the yen, the dollar last traded at 92.28 yen, up 0.1 percent on the day, according to Reuters data.

The yen showed little reaction after Japan's prime minister nominated, as expected, Asian Development Bank President Haruhiko Kuroda as BOJ governor and academic Kikuo Iwata as one of the two deputy governors.

The Japanese parliament is expected to approve the nominations, clearing the way for the central bank to unveil fresh easing steps in April, which could add to pressure on the yen.

The dollar has risen steeply against the yen since November, hitting a 33-month high of 94.76 yen on Monday.

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