* 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 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
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.