February 27, 2013 / 4:15 AM / 5 years ago

FOREX-Yen holds gains as investors await Italian bond sale

* Italy bond auction could signal euro direction
    * Bernanke's testimony curbs dollar demand

    By Lisa Twaronite and Ian Chua
    TOKYO, Feb 27 (Reuters) - The yen held onto its edge against
its major counterparts in Asian trading on Wednesday as
investors awaited an Italian bond auction later in the session
which could give clues on the direction of the euro.
    Italy's borrowing costs have soared on the back of a
political stalemate following its recent election, creating a
challenging environment for the country's sale of new 10-year
bonds and five-year paper.
    Markets are already uneasy after the election produced no
clear winner and the single currency could lose ground again if
Italy is forced to pay far higher borrowing costs than before
the polls.          
    The dollar was at 91.90 yen, down about 0.1 percent
from North American trading on Tuesday but still managing to
hold above a one-month low of 90.85 touched on Monday. The euro
stood at 120.05, down about 0.1 percent but above
Monday's one-month low of 118.74 yen. 
    The euro struck a 34-month high of 127.71 yen on Feb. 6, and
the dollar hit a 33-month high of 94.77 yen on Monday.
    "The overall trend of yen weakness might still be intact,
but there is a perception in the market that Monday's move was
overdone," aid Marito Ueda, director at FX Prime Corp. in Tokyo.
    The Japanese currency was caught between investors seeking
to book profits on bearish positions and those building new
short positions at these levels, market participants said.
    The yen has been the worst performing major currency so far
this year as investors bet on more aggressive policies from the
Bank of Japan to whip deflation, and investors have positioned
for more monetary stimulus. 
    This week's sharp yen gains sparked by fears of political
deadlock in Italy were a wake-up call to investors and a
challenge to Prime Minister Shinzo Abe. 
    Comments from Federal Reserve Chairman Ben Bernanke on
Tuesday helped alleviate some market concerns about an early end
to the Fed's bond buying programme, which also somewhat cooled
demand for the greenback.   
    The renewed market angst about the euro zone saw investors
quickly switch focus to the euro from the yen. 
    The euro plumbed a seven-week trough of $1.3017 on the EBS
trading platform on Tuesday. It last traded at $1.3065,
nearly flat from Tuesday's late U.S. levels. The common currency
has shed about 5 percent since peaking at a 15-month high of
$1.3711 on Feb. 1.
    "It seems likely that the stop of 1.2980 on our long EURUSD
recommendation (from 1.3180 established last week) is at risk,"
said BNP Paribas strategist Vassili Serebriakov. 
    "However we do not believe this is the start of the next
round of a Europe-wide debt crisis, given that Italy's overall
fiscal position is relatively stable and that investors do not
appear to be overweight European assets, which should limit the
impact of any unwind."
    Renewed European concerns also took a toll on commodity
currencies. The Australian dollar was slightly lower at $1.022,
after it fell to four-month low of $1.0198 on Tuesday
but did not sustain a break of $1.0200. A clean break below that
level would bring into focus the October low of $1.0149.
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