* Italy's Monti says he will quit once budget is passed
* Italian turmoil threatens contagion effect on Spain
* Fed meeting on Wednesday significant for dollar
By Julie Haviv
NEW YORK, Dec 10 The euro rose against the
dollar for the first time in four sessions on Monday as comments
made by Italy's prime minister allayed fears about the country's
outlook, although concerns about the euro zone's near-term
prospects kept gains limited.
Mario Monti said on Saturday he would resign once the 2013
budget passes. An election in February looks probable, with
investors worried about who will navigate the euro zone's
third-biggest economy out of the debt crisis.
The euro, weighed earlier in the session by a spike in
Italy's borrowing costs, rose after Mario Monti tried to
reassure rattled financial markets that Italy would not be left
adrift following his surprise decision to resign and Silvio
Berlusconi's return to frontline politics.
Some analysts noted that the bond and currency markets'
reaction to Italy's news may have been overdone, given the fact
that Monti would have called for elections in a few months time
anyway. Monti's decision simply expedites the process.
"The markets overreacted to the weekend news and so now we
are seeing a pullback and somewhat of a 'risk on' climate,"
Sebastien Galy, fx strategist at Societe Generale in New York.
"We are range trading for the most part and fading some of
the euro zone risk," he said.
The euro was down 0.1 percent on the day against
the yen at 106.52 yen, falling for a third straight day. It
dropped as low as 105.94 yen, its weakest in about two weeks.
Against the dollar, the euro was up 0.3 percent at
$1.2932. Euro resistance remains at the $1.2940 level, traders
said, with support at $1.2885 and $1.2860.
"Given the chaotic history of Italian politics, it is almost
certain that whoever is elected prime minister will not be able
to exercise anywhere near the level of control over the
country's fiscal policy enjoyed by Mr. Monti," said Boris
Schlossberg, managing director of FX strategy at BK Asset
Management, in New York.
While Italy has nearly completed its planned bond market
funding for this year, the latest political turmoil could hinder
its ability to borrow around 420 billion euros in 2013.
There could also be an impact on neighboring Spain whose
government is studying the need for outside help.
Concerns about core euro-zone countries also weighed on the
common currency. Germany's Bundesbank last week slashed its
growth outlook for Europe's largest economy.
The euro was also pressured by data showing that Germany
posted its narrowest trade surplus in October in more than half
Caution that the Federal Reserve may take fresh steps on
monetary easing later this week limited the dollar's advance.
The dollar index was down 0.1 percent at 80.334.
Many economists expect the Fed to announce on Wednesday
monthly bond purchases of $45 billion, signalling it will keep
pumping money into the economy to bring down unemployment. That
should be bearish for the dollar in general.
Bob Lynch, global head of FX strategy at HSBC in New York,
said the Fed's likely announcement of further asset purchases on
Wednesday may not overly pressure the dollar as the market has
already factored it in, but over the longer term, the negative
effect would be more pronounced.
"We view the Fed's asset purchases and the effective
monetization of government debt as debasing to the dollar,
undermining its reserve currency status in a manner that will
ultimately be reflected in some lowering of its exchange-rate
value," Lynch said.
The dollar also was pressured by signs that Washington
policymakers are no closer to averting the so-called fiscal
cliff. Analysts say the tax hikes and spending cuts set to take
hold next year could push the U.S. economy back into recession.
Data showed speculators' net yen short positions last week
rose to their highest since mid-2007. With short bets already
stretched, traders said it would be difficult for the dollar to
advance against the Japanese currency.
The Bank of Japan will probably ease monetary policy next
week, sources say, as looming risks such as the potential
fallout from the U.S. fiscal cliff and slow Chinese growth
continue to cloud the outlook for an economy already seen as in
The dollar last traded flat against the yen at 82.32 yen
, according to Reuters data.