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Euro rebounds but Italy fears remain

Tuesday, February 26 12:45:06

The euro recovered against the dollar today as investors chose to buy back the single currency after it plummeted to a seven-week low earlier on fears of a political deadlock in Italy could cause wider problems.

Gains in the euro may, however, prove short-lived, according to some strategists, as the inconclusive election in Italy threatens to hinder economic reforms there and trigger a renewed euro zone crisis.

A fragmented parliament in Italy, the euro zone's third largest economy, could reignite fears about other heavily indebted countries, particularly Spain and raise doubts on whether the region had seen its worst.

The euro rose to as high as $1.3119, rebounding from $1.3018 hit during early London hours which was its lowest since Jan. 7. It was last trading up 0.2 percent on the day at $1.3081.

"Ongoing uncertainty regarding the Italian vote, as markets try and understand how the (political) deadlock can be broken and if it will be broken, has driven Italian assets and the euro lower," said Jeremy Stretch, head of currency strategy at CIBC.

"We have seen a cautious bounce (in the euro) but it doesn't look like we are seeing anything durable here and the risk is that the euro's performance remains relatively compromised."

Against the yen, the euro was up 0.4 percent at 120.39 yen, but not far from a one-month low of 118.74 yen struck on Monday when it posted its single biggest percentage loss since early May 2011.

Traders said the main buyer of the pair was a U.S. bank and cited stop-loss orders above $1.3120, close to its 100-day moving average of $1.3123, which was likely to cap gains. Reuters