* Borrowing costs rise at Italian bond auction
* Strategists see scope for euro to fall below $1.30
* Bernanke expected to reiterate support for Fed stimulus
By Nia Williams
LONDON, Feb 27 The euro pared gains against the
dollar on Wednesday to trade near a seven-week low after Italian
borrowing costs rose at the country's first debt auction since
an inconclusive election.
Italian 10-year debt costs climbed more than half a
percentage point at the auction, raising concerns the euro zone
debt crisis could re-emerge in the region's third largest
The single currency fell to $1.3079 after the Italian
auction from a session high of $1.3123, that was hit after a
survey showed euro zone economic and business confidence
improved for a fourth straight month in February.
It was last up 0.2 percent on the day at $1.3086.
The euro held above Tuesday's low of $1.3018, which was its
weakest since Jan. 7, but strategists further losses were likely
as uneasy investors wait to see whether Italian politicians can
form a coalition, or will call fresh elections.
"Euro weakness is going to return and I think by the end of
the day we will see a drop through yesterday's lows," said Adam
Myers, senior FX strategist at Credit Agricole.
"A grand coalition is not going to be announced any time
soon and until we get any sign of a new election uncertainty is
going to continue."
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.
Investors were also looking ahead to U.S. Federal Reserve
Chairman Ben Bernanke's testimony to the House Financial
Services Committee later on Wednesday.
Market players said Bernanke was expected to reiterate
comments from Tuesday, when he said the central bank would keep
buying bonds for a while, helping alleviate some market concerns
about an early end to the Fed's easing programme.
Bernanke's comments curbed demand for the dollar, which
tends to be weakened by loose U.S. monetary policy.
The yen firmed against the dollar and euro, benefiting from
being seen as a safe-haven currency by investors nervous about
the political deadlock in Italy.
The dollar fell 0.4 percent on the day to 91.62 yen
but managed to hold above a one-month low of 90.85 touched on
Monday. The euro stood at 120.01, down 0.1 percent on
the day and holding above Monday's one-month low of 118.74 yen.
Despite this week's gains, the yen has been one of the worst
performing major currency 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.
The dollar hit a 33-month high of 94.77 yen on Monday.
Strategists said the yen's current rebound was likely to be
short-lived given demand among Japanese investors for
higher-yielding foreign assets.
"The yen weakening trend will resume because on the Japanese
side of the equation the incentive to look for better returns
elsewhere is still there," said Ian Stannard, head of European
FX strategy at Morgan Stanley.
Morgan Stanley are looking for a move towards 95 yen.
Renewed euro zone concerns took a toll on growth-correlated
commodity currencies. The Australian dollar fell 0.4 percent to
a 4-1/2 month low of $1.0184, bringing into focus the October
low of $1.0149.