* 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 Gertrude Chavez-Dreyfuss
NEW YORK, Feb 27 The euro rose against the
dollar on Wednesday, bolstered by solid demand for Italy's
first bond sale since its general elections, but the current
political uncertainty in the euro zone's third-largest country
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.
The country 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 as the weekend
elections showcased the lack of popular support for austerity
policies and resulted in a hung parliament.
"The uncertainty in Italy does not bode well for the Italian
economy which is going through a tough recession as it is. It
does not need yet another stumbling block while trying to
recover," said Sean Cotton, vice president and foreign exchange
advisor, at Bank of the West in San Ramon, California.
The euro last traded at $1.3125, up 0.5 percent on
It briefly pared gains after European Central Bank President
Mario Draghi said on Wednesday the bank is far from exiting its
easy monetary policy as the recovery in the euro zone is going
slowly. Draghi made the remarks in Germany.
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 trough 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
Jay Meisler, founder and co-partner of GlobalView.com in
Huntington, New York pointed out that the $1.31 level is
crucial, having risen to that level several days in a row. He
added investors will normally look at these gains as bear market
rallies unless the euro gets to the $1.3150-$1.3200 range.
"Typically, after a big move like this, you need to shake
out weak shorts before a fresh assault on the downside," Meisler
In the options market, the one-month euro/dollar risk
reversals had shown on Tuesday 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
Also on Wednesday, Federal Reserve Chairman Ben Bernanke in
testimony to the U.S. House of Representatives reiterated his
comments the previous day before the Senate that the central
bank would keep buying bonds for some time. The remarks have
helped alleviate some market concerns about an early end to the
Fed's easing program.
The safe-haven yen fell against the dollar as risk appetite
The U.S. dollar last traded at 92.31 yen, up 0.3
percent, above a one-month low of 90.92 but below a 33-month
high of 94.76 touched on Monday. The euro stood at 121.14 yen
, up 0.8 percent on the day.
The yen has been one of the worst performing major
currencies 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 weakest
currencies this year. British government bonds rose on Wednesday
after a top central banker said Britain's economy might need
more bond purchases over a longer period than before.
Elsewhere, the Swiss National Bank is far from abandoning
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 1.2222 francs, up 0.4
percent on the day.