FOREX-Euro salvaged by Italy debt sale, yen on defensive
* Euro off lows, steadier after early-week selloff
* Healthy demand at Italy bond sale offset political uncertainty
* Strong U.S. durable goods orders support risk appetite
* Japan nominates Kuroda as next BOJ chief as expected, no yen reaction
* Market takes U.S. fiscal spending cuts threat in stride
By Ian Chua and Hideyuki Sano
SYDNEY/TOKYO, Feb 28 (Reuters) - The euro held its ground against the dollar and yen on Thursday, after a relatively smooth auction of Italian government bonds helped temper concerns about the country's political deadlock.
Strong U.S. business spending data also boosted investors' sentiment, easing worries about looming U.S. fiscal spending cuts and prompting the yen to resume its descent after a brief spell of sharp gains earlier this week.
"Looking at the U.S. core capital goods orders, there's absolutely nothing unhealthy in it. It shows American businesses do not seem to worry about the spending cuts. Considering that, there will be limited downside in the dollar/yen," said Hideki Amikura, head of forex at Nomura Trust Bank.
The common currency edged up 0.1 percent to $1.3147, having pared more than four fifths of the losses it had made after the inconclusive Italian elections, which had taken the currency down to an eight-week trough of $1.3018 on Tuesday.
Technically, the single currency has managed to keep holding above an important chart support, the bottom of the daily Ichimoku charts, a break of which would have flashed a major bearish signal for the currency.
Against the yen, the euro rose 0.2 percent on the day to 121.40 yen, inching further up from a five-week low of 120.20 yen set on Monday.
A sale of Italian government bonds on Wednesday drew solid demand, helping soothe jitters that the political deadlock could destabilise Europe's second-biggest sovereign debt market.
The euro was unfazed by diminishing hopes of a coalition government -- and an increasing chance of new elections -- in Italy, with two most likely coalition options appearing to fall apart.
Anti-establishment 5-star Movement boss Beppe Grillo slammed the door on overtures from the centre-left leader Pier Luigi Bersani while Bersani's junior coalition partner ruled out an alliance with former prime minister Silvio Berlusconi's centre-right.
While uncertainty on Italy could cap the euro, some market players say the euro's recovery in the past couple of days suggested most investors do not regard the latest political turmoil in Rome as a major threat to Italy's debt financing.
The steadier euro, for now, saw the dollar index retreat from a six-month high of 81.948 reached earlier in the week. It was last at 81.530.
On the yen, the dollar was a tad firmer at 92.35, having found its footing after Monday's slide to 90.85.
The yen showed no reaction after Japan's prime minister nominated, as expected, Asian Development Bank President Haruhiko Kuroda as BOJ governor and Kikuo Iwata, an academic, as one of the two deputy governors.
The parliament is expected to approve the nominations, clearing the way for the central bank to unveil fresh easing steps in April, either at their first policy review on Apr 3-4, or the following one on Apr 26.
Expectations of more aggressive easing had prompted investors to push the yen down to a 33-month low of 94.77 yen per dollar on Monday, which marked a 16 percent fall since mid-November.
"The market will need a bit of consolidation after such a long period of one-way falls in the yen. But there's no denying that the yen is in a downtrend in a longer term," said Nomura Trust's Amikura.
"I expect the yen to drop more in April, as the market will bet on fresh monetary easing at the BOJ's meeting at the end of April," Amikura added.
The dollar outperformed its Japanese counterpart even after Federal Reserve Chairman Ben Bernanke again defended the central bank's forceful easing of monetary policy.
Bernanke, facing a congressional panel for a second day, also downplayed signs of internal divisions, saying the policy of quantitative easing has the support of a "significant majority" of top central bank officials.
The dollar was also propped up by data showing planned U.S. business spending recorded its largest increase in more than a year in January.
The dollar has so far weathered the threat from sharp U.S. fiscal spending cuts, known as "sequestration", which analysts estimate will cut U.S. growth by about 0.5 percent.
The automatic spending cuts of $85 billion look increasingly likely to start as scheduled on Friday, with U.S. President Barack Obama and Republican congressional leader nowhere near a deal to avoid them.
"I guess the market is calm partly because payroll tax hikes that started earlier this year haven't so far done much damage to risk appetite," said Teppei Ino, currency analyst at the Bank of Tokyo-Mitsubishi-UFJ.
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