* Italy swears in new government, borrowing costs fall
* Focus on Fed and ECB policy meetings
* Dollar rises vs yen after stronger U.S. housing data
By Wanfeng Zhou
NEW YORK, April 29 The euro rose against the
dollar and yen on Monday after Italy finally formed a
government, ending two months of political uncertainty, but
further gains may be limited given expectations the European
Central Bank will cut interest rates this week.
Italy's new prime minister, center-left politician Enrico
Letta, named a coalition government on Saturday, a move that
drove Italian stocks higher and benchmark borrowing costs to
their lowest level since October 2010 at an auction on Monday.
Some analysts say the euro could weaken should the ECB cut
its main interest rate by 25 basis points from 0.75 percent
currently when it meets on Thursday; a rate cut would erode the
euro's interest rate advantage over the dollar and yen.
"The euro would likely weaken somewhat on that, but the
overall move will be muted," said John Doyle, currency
strategist at Tempus Consulting in Washington, D.C. "The
expectation is starting to get priced in."
Boris Schlossberg, managing director of FX Strategy at BK
Asset Management in New York, said the euro could even rally
after a knee-jerk move lower as some investors see a rate cut by
the ECB as another effort to stimulate the euro zone economy.
"It's clear that the euro zone economy is really in a
quagmire and it needs some kind of jumpstart," Schlossberg said.
"There's almost nothing else available. A rate cut is better
"Even though the market initially perceives the rate cut as
a negative thing, it will actually be disappointed if they don't
see the rate cut and that can drive the euro down."
Signs are growing that weakness in peripheral euro zone
economies is spreading to the region's core, such as Germany,
the region's biggest economy. Confidence in the euro zone's fell
more than expected in April, data showed on Monday, highlighting
the souring mood among companies and consumers since March.
The euro was up 0.5 percent at $1.3084, with hedge
funds cited among key buyers. The session peak of $1.3115, the
highest since April 19, was reached midway through the London
Other investors, however, are arguing for broader dollar
weakness after recent weak U.S. data, saying the euro could hold
on to its gains.
The U.S. economy grew more slowly than expected in the first
quarter, and with inflation anchored, expectations are fading
that the Federal Reserve could cut back its quantitative easing
program anytime soon.
"That is weighing on the dollar," said Ian Gunner, portfolio
manager at Altana Hard Currency Fund In London.
Gunner said only a cut in the ECB's zero percent deposit
rate, which he did not expect, would cause the euro to fall
A two-day Federal Reserve policy meeting beginning on
Tuesday is also being watched. If the Fed flags fresh risks to
growth, some of the long dollar positions put in place in recent
months could be trimmed.
Against the yen, the dollar rose 0.1 percent, to 98.10 yen
, erasing losses after stronger-than-expected data on
sales contracts for previously owned U.S. homes.
The dollar set a four-year high of 99.94 yen earlier in
April after the Bank of Japan announced a major stimulus
The dollar has faced stiff resistance at 100 yen, but many
expect it to firm against the yen as Japanese investors such as
insurance companies and pension funds allocate some of their
portfolios to overseas assets in coming months.