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Euro up but vulnerable to Italy auction

Wednesday, February 27 10:20:28

The euro edged away from a seven-week low against the dollar today but looked vulnerable to the risk an inconclusive Italian election will sour demand for the country's bonds at an auction later.

Strategists said higher borrowing costs at the sale of five- and 10-year bonds would fuel concerns the euro zone debt crisis could re-emerge in the region's third largest economy and could push the euro lower.

Even if the auction goes well, demand for the single currency could be muted for weeks as uneasy investors wait to see whether Italian politicians can form a coalition, or will call fresh elections.

The euro was last up 0.2 percent on the day at $1.3086, still close to yesterday's low of $1.3018, which was its weakest since Jan. 7. The single currency has shed about 5 percent since peaking at a 15-month high of $1.3711 on Feb. 1.

"This auction will put to the test current market sentiment. There's a chance it will disappoint and if that's true the euro will break through $1.30," said Carolin Hecht, currency strategist at Commerzbank.

"Even if the auction runs OK the euro should continue to trade in a subdued, sideways mood."

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.

Investors were also looking ahead to U.S. Federal Reserve Chairman Ben Bernanke's testimony to the House Financial Services Committee later on Wednesday.

"Italian uncertainties weigh on the global market, so most (investors) would like to wait, and some of them would also like to check what Bernanke says," said Masashi Murata, FX strategist at Brown Brothers Harriman in Tokyo.

Market players said Bernanke was 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. Reuters