The euro rose against the dollar on Wednesday, recovering from a slide to a four-month low on Cyprus's rejection of the terms of a bailout, as buyers emerged among investors convinced a deal would be reached. The Cypriot parliament rejected on Tuesday a proposed levy on bank deposits, which was a condition for the bailout, throwing efforts to rescue the indebted euro zone country into disarray and triggering a sell-off in the euro.
The general assumption in markets was that policymakers would cobble together a deal to keep Cyprus in the currency bloc, although analysts and traders said the euro remained vulnerable. Some analysts also said a Federal Reserve policy decision later on Wednesday could put the euro back under pressure by highlighting the discrepancy between an improving US economy and the fragile euro zone.
The euro was up 0.4 percent at $1.2940, recovering from Tuesday's four-month low of $1.28435 and holding above chart support at the 200-day moving average around $1.2876. One trader said Tuesday's slide was prompting a short-covering rally which could take the euro towards $1.2960. Any rise could be seen as an opportunity to sell the currency. "The Cypriot situation is a short-term issue which adds to the euro's weakness," said Asmara Jamaleh, currency strategist at Intesa Sanpaulo in Milan.
She said Intesa Sanpaulo forecast the euro would fall to $1.27 within one month, down from a $1.30 forecast previously, with a risk it could fall further towards $1.25. Some strategists said the European Central Bank's assurance on Tuesday that it was committed to providing liquidity to Cypriot banks within certain limits had helped curb euro losses.
"Markets in Europe are used to getting a solution at the very last minute," said Lutz Karpowitz, currency analyst at Commerzbank. However, the unprecedented plan to impose a levy on citizens' savings in Cyprus, announced over the weekend, has stirred worries that savers in other, larger European countries might withdraw their deposits. The euro was also buoyed by a rise in sterling after minutes from the last Bank of England policy meeting showed members were still split at 6-3 on further asset purchases, confounding some expectations of a closer vote.
However, analysts said any gains in sterling may prove fleeting, given speculation that UK finance minister George Osborne could change the remit of the BoE to give it more leeway to stimulate growth when he presents the annual budget later on Wednesday. Sterling was last up 0.14 percent on the day at $1.5116. After that, focus will turn to the Federal Reserve, which is expected to maintain its policy of buying $85 billion a month in mortgage and Treasury bonds although there is expected to be a debate about the potential risks of stimulus.
In Japan, the market was wary of any comments from Haruhiko Kuroda, who becomes governor of the Bank of Japan on Wednesday. Expectations are high that the BOJ will embark on a much more aggressive monetary policy to fight deflation. The dollar was up 0.2 percent at 95.35 yen.
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