* Euro wallows near four-month lows vs USD
* Italy's funding costs rise, Cyprus banks set to reopen
* Yen slide loses downward momentum as BOJ meeting awaited
By Anirban Nag
LONDON, March 28 The euro struggled near
four-month lows against the dollar on Thursday and could ease
more, hurt by the risk of capital outflows due to the fallout
from a rescue deal for Cyprus and ongoing political problems in
Cyprus opens its banks on Thursday with tight controls in
place to prevent a bank run. While that should slow the pace of
deposit withdrawals, the euro was vulnerable given concerns the
Cyprus deal, where depositors and private bondholders are left
with huge losses, instead of taxpayers, could become a template
for future bank bailouts for struggling euro zone countries.
That could encourage jittery investors to sell euro zone
assets and prefer the safety of the dollar, the yen,
the Swiss franc or even the British pound.
These concerns along with ongoing political uncertainty in
Italy, and a weak economic outlook across the euro zone would
keep the euro pinned down, analysts said.
The euro was down 0.1 percent on the day at $1.2770,
not far from a four-month low of $1.2750 hit on Wednesday.
Traders said month-end demand from investors rebalancing their
bonds and stocks portfolio would offer it some support, but any
bounce towards Wednesday's high of $1.2867 would see fresh
"It is the worry about the broader euro zone banking system
and the slow contagion that we could see from the Cyprus bailout
deal along with the political uncertainty in Italy that will see
downward pressure on the euro," said Simon Derrick, head of
currency strategy at Bank of New York Mellon.
"We could see the euro towards the low $1.20s by year-end."
Italy's borrowing costs rose on Wednesday with Italian
centre-left leader Pier Luigi Bersani left with only slim hope
of forming a government after talks with rival party leaders
ended with rejection from Beppe Grillo's 5-Star Movement.
"If Italy has to hold a re-election, that will surely remind
the market of a fall in the euro after Greece was forced to hold
a re-election last year," said Ayako Sera, market economist at
Sumitomo Mitsui Trust bank.
Given the ongoing problems in the euro zone, investors chose
the safety of the more liquid yen. The euro was down 0.2 percent
against the yen at 120.40 yen, not far from a
one-month low of 119.945 struck on Wednesday.
The yen also gained 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.
Some analysts say given high expectations of aggressive
easing from the Bank of Japan, there is a risk of
disappointment. That could give the yen a boost after the BOJ
The dollar was down 0.3 percent at 94.15 yen with
bids to buy the U.S. currency cited at 94 yen.
"The market was pricing in 'surprise' easing but there's no
surprise anymore, nothing new in Kuroda's statements, so people
are inevitably covering their yen shorts," said Masashi Murata,
senior currency strategist at Brown Brothers Harriman in Tokyo.
U.S. data like jobless claims, the final reading of
fourth-quarter gross domestic product and the Chicago PMI are
all due on Thursday and better-than-expected numbers could give
the dollar a boost.
(Editing by Chris Pizzey, London MPG Desk, +44 (0)207 542-4441)