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NEW YORK (Reuters) - The euro rose against the dollar on Thursday, a day after hitting a four-month low, but analysts called the rebound tenuous because investors remained nervous about the Cyprus crisis and Italy's political gridlock.
Month- and quarter-end positioning buoyed the euro, with investors covering bets against the currency as Cypriot banks re-opened for business for the first time in two weeks under tight controls to prevent a run on deposits.
Although these measures prevented a rush of flows out of banks, some analysts said curbing the free flow of cash in Cyprus was bad for the euro zone.
Cross-asset support, such as the record high in the benchmark S&P 500 stock index .SPX, helped the greenback from sinking even lower after weak U.S. economic data, including a rise in weekly jobless claims and a pullback in the pace of growth in business activity in the nation's heartland, said one analyst.
"We didn't see a bigger correction today because the stock market has been holding up so well," said David Woo, head of global rates and currencies at Bank of America Merrill Lynch in New York.
Data also showed the U.S. economy expanded at a sluggish pace in the fourth quarter, although a big gain in business investment and higher exports of services led the government to push up its previous estimate for growth.
Woo says he expects more weak economic data to confirm a "more significant slowdown."
"I think the euro/yen is a better trade that the euro/dollar. Sell the euro and buy the yen," Woo said.
"I just think euro/yen is a more all encompassing trade. ... When the U.S. doesn't do well, Japan, as a safe haven, is going to do better than Europe," he said.
The euro was poised to end the first quarter notching a roughly 2.9 percent loss against the dollar, its first quarterly decline since the second quarter of 2012.
The single currency shared by 17 countries was also positioned to show a drop of about 1.8 percent for March, its second straight monthly loss.
Investors feared the deal in Cyprus, which caused huge losses for depositors and private bondholders instead of taxpayers, could be a blueprint for future bank bailouts for other euro zone countries.
Capital controls are a historic and negative event that shifts the fundamental core of Europe's economic and monetary union, according to Camilla Sutton, chief currency strategist at Scotiabank in Toronto.
Support for the euro heading into the long Easter holiday weekend is expected to be fleeting, Sutton said.
U.S. financial markets will be closed on Friday in observance of the Good Friday holiday.
The euro last traded up 0.28 percent at $1.2816, above the four-month low of $1.2750 hit on Wednesday. Traders said month-end demand from investors rebalancing their bonds and stocks portfolio offered the euro support, but a bounce toward Wednesday's high of $1.2867 could bring fresh selling.
Apart from worries in Cyprus, political confusion in Italy pushed up borrowing costs on Wednesday, hurting the euro.
Italy's center-left alliance made a last-ditch appeal to other parties on Thursday to clear the way for a new government before its leader, Pier Luigi Bersani, reports back to President Giorgio Napolitano later in the day.
The euro edged down against the yen at 120.65 yen, recovering slightly from a one-month low of 119.71 hit earlier in the day.
The dollar was poised to notch around a 8.5 percent rise against the yen in the first quarter and about a 1.8 percent gain in March, marking its sixth straight monthly gain.
The dollar last traded at 94.14 yen, down 0.31 percent on the day, according to Reuters data.
The yen was supported 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.
With expectations high of forceful easing from the Bank of Japan, the yen could gain should the BoJ disappoint.
More aggressive investment in Japanese government bonds with longer maturities is well anticipated by the market and the elimination of the banknote rule may not be a significant positive surprise at this point, according to Jens Nordvig, global head of FX strategy, at Nomura Securities in New York.
"Thus, we judge huge positive surprises from the BOJ next week are getting less likely," he said. "Even though the policy meeting next week may invite profit taking by investors who have already elevated expectations for the BOJ, bolder policy responses from the BOJ next week can sustain the gradual rise of the dollar versus the yen."
Additonal reporting by Anooja Debnath in London; Editing by David Gregorio and Leslie Adler