FOREX-Euro rises versus dollar but poised to end qtr with a loss
* Euro rebounds from four-month low vs dollar * Cypriot banks open amidst tight capital control measures * Italy's funding costs rise as political worries persist * Yen slide loses downward momentum before BOJ meeting By Julie Haviv NEW YORK, March 28 (Reuters) - The euro rose against the dollar on Thursday, a day after hitting a four-month low, but analysts called the rebound tenuous because investors remained nervous about the Cyprus crisis and Italy's political gridlock. Month- and quarter-end positioning buoyed the euro, with investors covering bets against the euro as Cyriot banks re-opened for business for the first time in two weeks under tight controls to prevent a run on deposits. Although these measures prevented a rush of flows out of Cypriot banks, some analysts said curbing the free flow of cash in Cyprus was bad for the bloc. The euro was poised to end the first quarter notching a roughly 2.7 percent loss against the dollar, its first quarterly decline since the second quarter of 2012. The single currency shared by 17 countries was also positioned to show a drop of about 1.7 percent in March, its second straight monthly loss. The euro hit a four-month low on Wednesday. Investors feared the deal in Cyprus, which caused huge losses for depositors and private bondholders instead of taxpayers, could be a blueprint for future bank bailouts for other euro zone countries. Capital controls within the European Monetary Union are a historic and negative event that shifts the fundamental core of the economic and monetary union, according to Camilla Sutton, chief currency strategist at Scotiabank in Toronto. "Leading into the long-weekend we are likely to see some position squaring, which combined with potential passive equity related euro buying, could cause temporary support for the currency," she said. "However, we expect that this will prove fleeting." U.S. financial markets will be closed on Friday in observance of the Good Friday holiday. The euro last traded up 0.5 percent at $1.2838, above a four-month low of $1.2750 hit on Wednesday. Traders said month-end demand from investors rebalancing their bonds and stocks portfolio offered the euro support, but a bounce towards Wednesday's high of $1.2867 could bring fresh selling. Concerns about Cyprus, along with ongoing political uncertainty in Italy, and a weak economic outlook across the euro zone should keep the euro pinned down, analysts said. Apart from worries in Cyprus, political confusion in Italy pushed up borrowing costs on Wednesday, hurting the euro. Italy's centre-left alliance made a last-ditch appeal to other parties on Thursday to clear the way for a new government before its leader, Pier Luigi Bersani, reports back to President Giorgio Napolitano later in the day. UPCOMING BANK OF JAPAN MEETING EYED The euro last traded flat against the yen at 120.72 yen, recovering slightly from a one month low of 119.71 hit earlier in the day. The dollar briefly reacted to data showing the number of Americans filing new claims for unemployment benefits rose more than expected last week. Separate data showed the U.S. economy expanded at a sluggish pace in the fourth quarter although a big gain in business investment and higher exports of services led the government to push up its previous estimate for growth. The yen, meanwhile, gained against the dollar on talk of repatriation flows by Japanese investors before the end of the financial year on March 31. That gave the currency a reprieve after it saw a period of sustained weakening due to expectations - now heavily priced in - of aggressive monetary easing by the Bank of Japan at new governor Haruhiko Kuroda's first policy review on April 3-4. With expectations high of forceful easing from the Bank of Japan, the yen could gain should the BoJ dissapoint. More aggressive investment in Japanese government bonds with longer maturities is well anticipated by the market and the elimination of the banknote rule may not be a significant positive surprise at this point, according to Jens Nordvig, global head of FX strategy, at Nomura Securities in New York. "Thus, we judge huge positive surprises from the BOJ next week are getting less likely," he said. "Even though the policy meeting next week may invite profit taking by investors who have already elevated expectations for the BOJ, bolder policy responses from the BOJ next week can sustain the gradual rise of the dollar versus the yen." The dollar was poised to notch around a 8.5 percent rise against the yen in the first quarter and about a 1.7 percent gain in this month, marking its sixth straight monthly gain. The dollar last traded at 94.08 yen yen, down 0.4 percent on the day, according to Reuters data.
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