* Euro rises from 7-week low as buyers emerge on dips
* But gains limited as Italy political gridlock weighs
* Dollar extends losses after U.S. home price data
* Bernanke's testimony at 1500 GMT
By Julie Haviv
NEW YORK, Feb 26 The euro rebounded from a
seven-week low against the dollar on Tuesday as investors opted
to buy at cheaper levels, but gains could prove fleeting should
political deadlock in Italy cause wider problems.
An electoral stalemate in Italy, the euro zone's
third-largest economy, could leave its economic reform efforts
in tatters and reignite the euro zone's broader debt crisis.
It could also reignite fears about other heavily indebted
countries, particularly Spain, and raise doubts on whether the
region had seen its worst.
"Ongoing uncertainty regarding the Italian vote, as markets
try to understand how the (political) deadlock can be broken and
if it will be broken, has driven Italian assets and the euro
lower," said Jeremy Stretch, head of currency strategy at CIBC.
"We have seen a cautious bounce (in the euro) but it doesn't
look like we are seeing anything durable here and the risk is
that the euro's performance remains relatively compromised."
The euro rose to as high as $1.3118, rebounding from
$1.3017 hit during early London hours which was its lowest since
Jan. 7. It last traded up 0.2 percent on the day at $1.3094.
Traders said the main buyer of the pair was a U.S. bank and
cited stop-loss orders above $1.3120, close to its 100-day
moving average of $1.3123, which was likely to cap gains.
Against the yen, the euro was up 0.6 percent at
120.58 yen, above a one-month low of 118.74 yen struck on Monday
when it posted its single biggest percentage loss since early
The euro has steadily lost ground this month, retreating
from a 15-month high against the dollar and a near three-year
high against the yen.
That is a swift turnaround from the start of 2013 when the
euro rallied on hopes the worst of the euro zone debt crisis was
Recent data, however, has reminded investors that the region
is still grappling with a recession as southern European
countries struggle to bring down high debt levels by imposing
"For the euro, the focus is on the 2013 lows below $1.30 and
events in Italy show that politicians are pushing back at fiscal
austerity measures," said Paul Robson, currency strategist at
RBS. "It is negative for the euro and until it remains below
$1.3170, it will remain a sell on rallies."
Italy's political turmoil saw its stocks and government
bonds fall sharply on Tuesday and also sparked a
sell-off of vulnerable Spanish and Portuguese bonds.
Strategists said Italy faces a larger hurdle on Wednesday
when it offers the market up to 6.5 billion euros of 5- and
10-year bonds, which would test foreign investors' appetite for
The euro extended gains versus the dollar after U.S. housing
data raised risk appetite. U.S. single-family home prices picked
up in December, closing out 2012 with the biggest yearly gain in
more than six years as the housing market got back on its feet.
Investors' focus will also be on Federal Reserve Chairman
Ben Bernanke's congressional testimony at 1500 GMT.
Bernanke faces the first of two days of congressional
testimony that will subject the Fed's controversial bond-buying
program to tough scrutiny and gauge his confidence in the
resilience of the U.S. economy.
Lawmakers in both chambers will seek his comment on the
likely impact of $85 billion in across-the-board government
spending cuts that are set to take effect on March 1.
Markets will be looking for hints on further policy moves
after some within the Fed have voiced concerns about how long it
should keep buying Treasury and mortgage-backed bonds, called
quantitative easing, to support the economy.
"Although markets have speculated that the Fed will begin to
curtail its QE buying program sometime in the foreseeable future
which would be positive for the dollar, we doubt that Bernanke
will communicate that message today," said Boris Schlossberg,
managing director of FX strategy at BK Asset Management in New
"Bernanke is a well-known dove on the FOMC and, given the
fresh credit risks out of Europe, we believe his impulse will be
to remain accommodative for now," he said.
The dollar last traded at 91.98 yen, up 0.2 percent
on the day after having tumbled to as low as 90.92 yen on
Monday, its lowest in nearly a month.
While expectations of more monetary easing by the Bank of
Japan could pressure the yen, the Japanese currency could remain
supported at the expense of growth-linked currencies if risk
appetite abates further.