FOREX-Dollar gains as Italy, U.S. spending cuts spur safety bid

Thu Feb 28, 2013 1:07pm EST

Related Topics

* Euro poised to notch worst loss vs dollar since May 2012

* Concerns about Italian political deadlock weigh on euro

* IMF to cut growth forecasts if U.S. spending cuts emerge

* Japan nominates Kuroda as next BoJ chief, as expected

By Julie Haviv

NEW YORK, Feb 28 (Reuters) - The dollar rose against the euro on Thursday as investors embraced safety against the backdrop of a political stalemate in Italy and with the United States only hours away from sweeping, automatic spending cuts that are expected to take a toll on the global economy.

Month-end flows made for choppy price action, with the euro poised to end February about 3.6 percent lower against the dollar, which would mark its worst monthly performance since last May.

Political instability in Italy, the euro zone's third largest economy, could continue to pressure the euro.

"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.

There are fears that a lack of commitment to economic reforms in Italy could reignite the euro zone debt crisis, now in its fourth year. Because of the size of the Italian economy, the European Central Bank may offer support should the debt crisis take a turn for the worse.

In Washington, positions hardened between President Barack Obama and Republican congressional leaders over the budget crisis even as they arranged to hold last-ditch talks to prevent the harsh automatic spending cuts due to begin on Friday. U.S. politicians appeared resigned to onset of the $85 billion in "sequestration" cuts.

"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 International Monetary Fund said it will likely cut its growth forecasts for the United States and the global economy if the spending cuts do take effect. It warned that the United States' biggest trading partners would be hardest hit.

The euro last traded at $1.3084, down 0.4 percent on the day, but above the session low $1.3055.

The euro held above a near eight-week low of $1.3017 hit on Tuesday after the inconclusive Italian elections. Options barriers ahead of $1.3160 could limit any gains.

"It has been a long week already," said Jens Nordvig, global head of currency strategy, at Nomura Securities in New York.

In addition to the shock from the Italian elections this week, the Bank of Japan named a new governor and Federal Reserve Chairman Ben Bernanke committed to sticking to the U.S. central bank's bond-buying program in testimony before Congress.

Bernanke's remarks blunted concerns about an early exit of the Fed's quantitative easing and helped Treasury yields move lower.

"Meanwhile, the dollar is at quite strong levels in a number of crosses, and we think there is an opportunity to be tactically short for the next one to two months," Nordvig said. "Key reasons involve a fairly weak U.S. data picture, persistent QE from the Fed, and a risk environment which is still fairly constructive."

Some market players expect 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 120.84 yen, down 0.3 percent on the day, but above a five-week low of 118.74 yen set on Monday.

U.S. DATA SHOWS IMPROVEMENT

The dollar briefly reacted to data showing anemic U.S. economic growth in the fourth quarter, although a slightly better performance in exports and fewer imports led the government to scratch an earlier estimate that the economy had contracted.

The government also reported a drop in new U.S. 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 92.34 yen, up 0.1 percent on the day, according to Reuters data.

The yen showed little reaction after Japan's prime minister, as expected, nominated Haruhiko Kuroda, president of the Asian Development Bank, as governor of the Bank of Japan and academic Kikuo Iwata as one of the bank's 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 greenback is poised to end February about 0.7 percent higher against the yen, notching its fifth straight monthly gain.

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

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