* Euro rises to session high of $1.3119 as buyers emerge on
* But gains limited as Italy political gridlock weigh
* Euro rise capped at $1.3123, its 100-day moving average
* Bernanke's testimony at 1500 GMT
By Anooja Debnath
LONDON, Feb 26 The euro recovered against the
dollar on Tuesday as investors chose to buy back the single
currency after it plummeted to a seven-week low earlier on fears
of a political deadlock in Italy could cause wider problems.
Gains in the euro may, however, prove short-lived, according
to some strategists, as the inconclusive election in Italy
threatens to hinder economic reforms there and trigger a renewed
euro zone crisis.
A fragmented parliament in Italy, the euro zone's third
largest economy, could reignite fears about other heavily
indebted countries, particularly Spain and raise doubts on
whether the region had seen its worst.
The euro rose to as high as $1.3119, rebounding from
$1.3018 hit during early London hours which was its lowest since
Jan. 7. It was last trading up 0.2 percent on the day at
"Ongoing uncertainty regarding the Italian vote, as markets
try and understand how the (political) deadlock can be broken
and if it will be broken, has driven Italian assets and the euro
lower," said Jeremy Stretch, head of currency strategy at CIBC.
"We have seen a cautious bounce (in the euro) but it doesn't
look like we are seeing anything durable here and the risk is
that the euro's performance remains relatively compromised."
Against the yen, the euro was up 0.4 percent at
120.39 yen, but not far from a one-month low of 118.74 yen
struck on Monday when it posted its single biggest percentage
loss since early May 2011.
Traders said the main buyer of the pair was a U.S. bank and
cited stop-loss orders above $1.3120, close to its 100-day
moving average of $1.3123, which was likely to cap gains.
Strategists at Morgan Stanley said they would look to close
long euro/dollar positions on any rebounds into the $1.3150 area
and "await clarification/stabilisation of the political picture
in Italy before re-entering bullish euro strategies."
The euro has steadily lost ground this month, retreating
from a 15-month high against the dollar and a near three-year
high against the yen.
Recent data has reminded investors that the region is still
grappling with a recession as southern European countries
struggle to bring down high debt levels by imposing painful
"For the euro, the focus is on the 2013 lows below $1.30 and
events in Italy show that politicians are pushing back at fiscal
austerity measures," said Paul Robson, currency strategist at
RBS. "It is negative for the euro and until it remains below
$1.3170, it will remain a sell on rallies."
Italy's political turmoil saw its stocks and government
bonds fall sharply on Tuesday and also sparked a sell-off of
vulnerable Spanish and Portuguese bonds.
Strategists said Italy faces a larger hurdle on Wednesday
when it offers the market up to 6.5 billion euros of 5-year and
10-year bonds, which would test foreign investors' appetite for
Investors' focus will also be on U.S. Federal Reserve
Chairman Ben Bernanke's congressional testimony at 1500 GMT.
Markets would be looking for hints on further policy moves
after some within the Fed have voiced concerns about how long it
should keep buying Treasury bonds to support the economy.
The Fed chief is expected to strike a dovish note, and that
could see the dollar pare some of its recent gains.
The dollar was up 0.2 percent against the yen at
91.98 yen, having tumbled to as low as 90.85 yen, its lowest in
nearly a month on Monday.
While expectations of more monetary easing by the Bank of
Japan could pressure the yen, the Japanese currency could remain
supported at the expense of growth-linked currencies if risk
appetite abates further.