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 US business spending plans hitting a one-year high lifted the market's appetite for risk, underpinning stocks and some commodity currencies. Italy, however, is fuelling 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. 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 December 7 trough of $1.2876. The euro held above Tuesday's low of $1.3017, which was its weakest since January 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.
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. The safe-haven yen fell against the dollar as risk appetite increased. The US 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 euro last changed hands at 1.2218 francs, up 0.4 percent on the day.