* Borrowing costs rise at Italian bond auction
* Scope for euro to fall below $1.30
* Bernanke expected to reiterate support for Fed stimulus
By Anirban Nag
LONDON, Feb 27 The euro rose on Wednesday on
relief that Italy was able to sell bonds despite mounting
political instability, though gains could be temporary with many
investors looking to sell at higher levels.
At the auction there was healthy demand for bonds, but
Italian 10-year debt costs climbed more than half a percentage
point, raising concerns the euro zone debt crisis could
re-emerge in the region's third largest economy.
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 later recovered to trade up 0.4 percent on the day at
$1.3115 although offers from sovereign investors at its 100-day
moving average of $1.3125 are likely to cap gains.
The euro held above Tuesday's low of $1.3018, which was its
weakest since Jan. 7, but strategists say further losses are
likely as uneasy investors wait to see whether Italian
politicians can form a coalition, or will call fresh
"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. That is a far cry from a 15-month high of
above $1.27 struck earlier this month.
In the options market, the one-month euro/dollar risk
reversals showed their highest bias for euro
weakness since late June as investors bought euro puts - bets
the currency will weaken. Risk reversals had flipped to euro
calls - bets it will rise - towards the end of last month.
Investors were also looking ahead to U.S. Federal Reserve
Chairman Ben Bernanke's testimony to the House Financial
Services Committee later on Wednesday.
Bernanke is 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. On the other
hand, signs that the Fed may withdraw some of its monetary
stimulus, as indicated by the minutes of the Fed's last policy
meeting, does give the dollar a boost.
UBS's chief currency strategist, Mansoor Mohi-uddin said
that while Bernanke is still dovish, a likely improvement in the
U.S. economy would set the stage for the Fed to lower its asset
purchase programme in the second half of the year.
"We prefer the dollar as the Fed will be withdrawing some of
its unconventional policy setting," he added.
The yen edged up, benefiting from being seen as a safe-haven
currency by investors nervous about the political situation in
Italy and which has the potential to throw global financial
markets into turmoil.
The dollar fell 0.3 percent on the day to 91.65 yen
but managed to hold above a one-month low of 90.85 touched on
Monday. The euro stood at 120.10, flat 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 expects the dollar to rise towards 95 yen.