February 27, 2013 / 9:31 PM / in 5 years

FOREX-Euro advances but gains likely capped by Italy concerns

* Italian bond sale solid, but borrowing costs rise
    * Bernanke reiterates support for Fed stimulus
    * Options market shows bias for euro weakness
    * SNB says far from ending policy of currency cap

    By Gertrude Chavez-Dreyfuss
    NEW YORK, Feb 27 (Reuters) - The euro rose against the
dollar on Wednesday, bolstered by  solid demand for Italy's
first bond sale since its general elections, but the current
political uncertainty in the euro zone's third-largest country
will likely contain any upside.
    Robust demand for Italy's bonds despite a rise in the
country's 10-year debt costs helped spur buying in the euro,
which had fallen nearly 1.0 percent against the dollar on Monday
in the wake of Italy's inconclusive elections. 
    The auction coupled with data showing a measure of U.S.
business spending plans hitting a one-year high lifted the
market's appetite for risk, underpinning stocks and some
commodity currencies. {ID:nL1N0BR6R6]
    Italy, however, is fueling renewed concern about the
re-emergence of the euro zone debt crisis. Doubts about Italy's
ability to reform its indebted economy resurfaced as the weekend
elections showcased the lack of popular support for austerity
policies and resulted in a hung parliament.
    "As long as the make-up and policies of Italy's government
are unclear, the euro will have a tough time recapturing $1.33,
let alone $1.34 or $1.35," said Kathy Lien, managing director at
BK Asset Management in New York.
    "Investors may be dipping their toes back into the water but
they won't be rushing back into European assets until they know
what type of coalition is formed in Italy and whether new
elections will need to be held." 
    The euro last traded at $1.3145, up 0.6 percent on
the day. 
    It briefly pared gains earlier after European Central Bank
President Mario Draghi said on Wednesday the bank is far from
exiting its easy monetary policy as the recovery in the euro
zone is going slowly. Draghi made the remarks in Germany. 
    The euro also found support from a survey showing euro zone
economic and business confidence improved for a fourth straight
month in February. 
    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 trough of $1.2876. 
    The euro held above Tuesday's low of $1.3017, which was its
weakest since Jan. 7. Strategists say further losses are likely
as uneasy investors wait to see whether Italian politicians can
form a coalition, or will call fresh elections. 
    Jay Meisler, founder and co-partner of GlobalView.com in
Huntington, New York pointed out that the $1.31 level is
crucial, having risen to that level several days in a row. He
added investors will normally look at these gains as bear market
rallies unless the euro gets to the $1.3150-$1.3200 range.
    "Typically, after a big move like this, you need to shake
out weak shorts before a fresh assault on the downside," Meisler
    In the options market, the one-month euro/dollar risk
reversals had shown on Tuesday their highest bias
for euro weakness since late June as investors bought euro put
options - bets the currency will weaken. Risk reversals had
flipped to euro calls - bets it will rise - toward the end of
last month.
    Also on Wednesday, Federal Reserve Chairman Ben Bernanke in
testimony to the U.S. House of Representatives reiterated his
comments the previous day before the Senate that the central
bank would keep buying bonds for some time. The remarks have
helped alleviate some market concerns about an early end to the
Fed's easing program.  
    The safe-haven yen fell against the dollar as risk appetite
increased. The U.S. dollar last traded at 92.20 yen, up
0.2 percent, above a one-month low of 90.92 but below a 33-month
high of 94.76 touched on Monday. 
    The euro stood at 121.12 yen, up 0.8 percent.  
    The yen has been one of the worst performing major
currencies 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 British pound is also one of the weakest
currencies this year. British government bonds rose on Wednesday
after a top central banker said Britain's economy might need
more bond purchases over a longer period than before.
    Elsewhere, the Swiss National Bank is far from abandoning
its policy of capping the strong Swiss franc, Chairman Thomas
Jordan said on Wednesday, pointing to new risks from the
indecisive outcome of the Italian election. 
    The euro last changed hands at 1.2218 francs, up
0.4 percent on the day.
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