FOREX-Euro falls, demand subdued by Italy worries

Thu Feb 28, 2013 7:49am EST

Related Topics

* Concerns about Italian political situation weigh on euro

* Focus on U.S. fiscal spending cuts threat on Friday

* Japan nominates Kuroda as next BOJ chief as expected

By Anooja Debnath

LONDON, Feb 28 (Reuters) - The euro fell against the dollar and yen on Thursday, with investors and speculators cautious about buying the single currency given political deadlock in Italy.

Strategists said month-end flows meant trade could be choppy, but any gains in the euro would be limited by concerns political instability will stall Italian economic reforms and reignite the euro zone debt crisis.

The euro was down 0.2 percent on the day at $1.3116, having earlier hit a session low of $1.3096, with hedge funds cited as the main sellers.

It held above a near eight-week low of $1.3018 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."

A relatively smooth auction of Italian debt on Wednesday also helped temper some concerns about Italian borrowing costs spiralling out of control.

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 $1.2998 hit in early January.

Against the yen, the euro fell 0.3 percent on the day to 120.82 yen, still some way off a five-week low of 118.74 yen set on Monday.

U.S. SPENDING CUTS

Some strategists said so far the market had been relatively calm about the budget crisis in the United States, where automatic spending cuts of $85 billion look increasingly likely to start on Friday.

U.S. President Barack Obama and Republican congressional leaders look nowhere near a deal to avoid them.

"The U.S. fiscal cliff was always one of the scheduled event risks of 2013 and it looks like the aggressive spending cuts are likely to go through," said Chris Turner, head of FX strategy at ING.

"Right now people are looking at the benign outcome of the cuts, but should there be any disappointing data later, like a decline in consumer or business confidence then market reaction will be magnified given the fiscal cliff backdrop."

The dollar index was last at 81.617 not far from a six-month high of 81.948 reached earlier in the week.

Against the yen, the dollar was close to flat at 92.19 yen , still some way off Monday's low of 90.85 yen.

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 94.77 yen on Monday. (Additional reporting by Anooja Debnath/editing by Chris Pizzey, London MPG Desk, +44 (0)207 542-4441)

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