Italian bond yields hit euro-era highs as funding fears mount By Deborah Levine and William L. Watts, MarketWatch NEW YORK (MarketWatch) — The U.S. dollar rose more against the euro on Monday as worries about Italy’s ability to fund itself outweighed relief over Greece’s decision to scrap a referendum on its latest bailout plan. The euro EURUSD -0.41% fell to $1.3736 from $1.3770 in North American trade late Friday. The dollar index DXY +0.09% , which tracks the U.S. unit against a basket of six major rivals, rose to 77.152 from 76.984. Yields on Italy’s 10-year bond jumped to their highest on record, as Italian Prime Minister Silvio Berlusconi came under pressure to resign ahead of a key budget vote on Tuesday, leading to speculation the measures could turn into a vote of confidence. Italy can be a bigger worry than Greece because it is a much larger economy and has the third largest amount of debt outstanding in the world. Read story on Italy’s debt, Burlusconi. ”Tomorrow’s vote of no confidence on the implementation of austerity measures potentially leading to a collapse of the government,” said Marc Chandler, global head of currency strategy at Brown Brothers Harriman. “Further Italian political paralysis is likely to be viewed negatively for the market.” The yield on 10-year Italian government bonds IT:10YR_ITA +5.04% jumped to a fresh euro-era high and remained up by 38 basis points, or 0.38 percentage points, at 6.50%, underlining fears the country may soon find itself unable to meet its funding needs. The yield premium demanded by investors to hold Italian bonds over 10-year German bunds DE:10YR_GER -7.61% touched 4.8 percentage points then eased slightly to 4.69 percentage points. “Italy is quickly becoming the new sore spot for the European credit crisis as the spread between Italian and German bonds blows out to euro-era highs,” said Boris Schlossberg, director of currency research at GFT. Remarks over the weekend by European Central Bank Governing Council member Yves Mersch contributed, strategists said. Mersch, who heads the Luxembourg central bank, told Italy’s La Stampa newspaper that ECB policy makers could decide not to continue buying Italian debt if the government fails to show it is sticking to its economic restructuring plans. Italy’s woes trumped any broader relief afforded by the weekend agreement brokered in Greece that will see Prime Minister George Papandreou step down to clear the way for the formation of a unity government that will approve the country’s latest bailout plan. Read about Greece, Papandreou. The euro zone was thrown into fresh turmoil last week when Papandreou unexpectedly announced the bailout plan would be subject to a referendum. He withdrew the plan after intense pressure from Germany and France and a rebellion within his own ruling PASOK party. It ended the week down 2.9%, its biggest drop since early September. See story on euro losses last week. Dollar should rally by year-end Important support is seen for the euro/dollar pair at $1.3700, analysts said, noting that the shared currency remains relatively resilient given the scope of recent turmoil surrounding the debt crisis. “Given how big the downside risks facing both the euro and [economic and monetary union] are though, it’s quite an odd environment to be in when the euro-dollar is still in a $1.35-$1.40 range,” said Stephan Gallo, head of market analysis at Schneider Foreign Exchange, in a research note. “Based on the heights that the dollar index climbed to during previous periods of euro distress, and given that we are still a good way off the previous high in euro short positions, a strong case can be made for at least one more significant rally in the dollar before the end of the year,” he said, while noting that structural fundamentals on both sides of the Atlantic raise questions about the appetite for aggressive moves in either direction by the euro versus the U.S. dollar. Ahead of the Bank of England’s policy meeting this week, the British pound GBPUSD -0.27% was little changed at $1.6024 from $1.6030. The euro EURGBP -0.05% fell 0.3% versus sterling to trade at 85.75 pence. “Sterling has performed well in the last few days, as the euro has continued to struggle to shake off periphery concerns and the dollar looks a little restricted by positioning,” wrote strategists at Lloyds Bank in London. Futures data show speculators have been similarly short the euro and the pound against the dollar, although there is less fundamental justification for sterling shorts, they said, which may suggest some downside risk for the euro/British pound cross. They see support in the 85.30 to 85.50 pence region. Against the Japanese yen, the dollar USDJPY -0.17% slipped to 78.08 yen from ¥78.17 on Friday.

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