* Italian bond sale solid, but borrowing costs rise
* Bernanke reiterates support for Fed stimulus
* Options market shows bias for euro weakness
* SNB says far from ending policy of currency cap
By Julie Haviv
NEW YORK, Feb 27 The euro rose against the
dollar for the first time in three sessions on Wednesday on
relief over solid demand for Italy's first bond sale since the
country's general elections, but the potential for political
uncertainty will likely contain any upside.
Robust demand for Italy's bonds despite a rise in the
country's 10-year debt costs helped spur buying in the euro,
which had fallen nearly 1.0 percent against the dollar on Monday
in the wake of Italy's inconclusive elections.
Italy's borrowing costs on the 10-year debt climbed more
than half a percentage point to a four-month high. Italy, the
euro zone's third largest economy, is fueling renewed concern
about a possible re-emergence of the euro zone debt crisis.
Doubts about Italy's ability to reform its indebted economy
resurfaced after the weekend elections showcased the lack of
popular support for austerity policies and resulted in a hung
"The last few days have reminded the market that there is
tremendous uncertainty risk in the euro zone in terms of
economic growth as well as the outlook for reform," said Camilla
Sutton, chief currency strategist at Scotiabank in Toronto.
"Technical and fundamental signals still warn of euro
downside ahead," she said. "Italy's vote warns that the path for
Europe has just become more complicated."
The euro last traded at $1.3094, up 0.3 percent on
the day, but below a session high of $1.3129.
The euro also found support from a survey showing euro zone
economic and business confidence improved for a fourth straight
month in February.
Technical strategists said there would be support for the
euro at this year's low of $1.2998, and below that around the
Dec. 7 low of $1.2876.
The euro held above Tuesday's low of $1.3017, which was its
weakest since Jan. 7. Strategists say further losses are likely
as uneasy investors wait to see whether Italian politicians can
form a coalition, or will call fresh elections.
"Euro weakness is going to return, and I think by the end of
the day we will see a drop through yesterday's lows," said Adam
Myers, senior FX strategist at Credit Agricole.
"A grand coalition is not going to be announced any time
soon, and until we get any sign of a new election uncertainty is
going to continue."
In the options market, the one-month euro/dollar risk
reversals showed their highest bias for euro
weakness since late June as investors bought euro put options -
bets the currency will weaken. Risk reversals had flipped to
euro calls - bets it will rise - toward the end of last month.
Also on Wednesday, Federal Reserve Chairman Ben Bernanke in
testimony to the U.S. House of Representatives reiterated his
prior day comments before the Senate that the central bank would
keep buying bonds for a while. The remarks have helped alleviate
some market concerns about an early end to the Fed's easing
The yen edged higher against the dollar, benefiting from
Japanese fiscal year-end flows and its status as a safe-haven
The U.S. dollar last traded at 91.84 yen, down 0.1
percent on the day, above a one-month low of 90.92 and below a
33-month high of 94.76 touched on Monday.
The euro stood at 120.38 yen, up 0.2 percent on
the day, above Monday's one-month low of around 118.74 yen.
The yen has been one of the worst performing major currency
so far this year as investors bet on more aggressive policies
from the Bank of Japan to beat deflation, and positioned for
more monetary stimulus.
Strategists said the yen's strength will likely be temporary
given demand among Japanese investors for higher-yielding
The British pound is also one of the worst performing
currencies this year.
British government bonds rose on Wednesday after a top
central banker said more gilt purchases over a longer period
than before might be needed to help Britain's economy.
Elsewhere, the Swiss National Bank is far from exiting its
policy of capping the strong Swiss franc, Chairman Thomas Jordan
said on Wednesday, pointing to new risks from the indecisive
outcome of the Italian election.
The euro last traded at 1.2208 francs, up 0.3
percent on the day, according to Reuters data.