* Markets wait to see if Italy can easily sell 5-year bonds * Euro pops above $1.3800 before fading slightly * Firm yen keeps alive danger of more intervention By Ian Chua and Hideyuki Sano SYDNEY/TOKYO, Nov 14 (Reuters) - The euro and commodity currencies held firm on Monday as investors cheered progress on tackling Europe's debt problems, but traders remained wary as Italy prepares to test the market's appetite with a bond sale. Most traders remain unconvinced if new governments in Italy and Greece can win back investors' confidence in their debt, and are looking to Italy's auction for near-term cues. The common currency was at $1.3754, having risen as high as $1.3811 in early trade, and slightly above $1.3751 hit in New York late on Friday. It also firmed against the yen, reaching 106.71 yen at one point from New York's 106.02. "Everything went to plan, if you like, over the weekend, so we're seeing a positive reaction," said Michael Turner, a strategist at RBC Capital Markets. On Sunday, Italy's president appointed former European Commissioner Mario Monti to head a new government charged with implementing urgent reforms to end a crisis that has endangered the whole euro zone. In Greece, new prime minister Lucas Papademos will seek to take advantage of a rare political truce on Monday to push through austerity steps and radical reform aimed at restoring the country's tattered credibility and staving off bankruptcy. Still, many traders are unsure if the euro can extend gains as it faces substantial resistance at around $1.3850, including the Ichimoku cloud top on charts at $1.3848, a 38.2 percent retracement of its late October-early November fall to $1.3865 and its Nov. 4 high of $1.3870. "It's good that Italy and Greece avoided political vacuums. But we have to see if national unity governments will function," said Katsunori Kitakura, chief dealer at Chuo Mitsui Trust Bank in Tokyo. Italian 10-year bond yields soared above 7 percent last week to levels seen as unsustainable, prompting unwelcome parallels to previous bailouts of other highly indebted euro zone countries. While those yields have come off their peaks, they remain elevated. Analysts fear Italy's potential inability to fund itself could be a systemic risk given the size of its economy and its status as the world's third-largest government debtor. For the moment, the market is looking at an auction of up to 3 billion euros in five-year bonds later in the day. The firmer euro saw the dollar index capped at 76.943, well off last week's high of 78.165. These developments in turn gave commodity currencies like the Australian dollar a boost. The Australian dollar briefly gained more than half a cent from late New York levels to hit a high of $1.0351, before fading to stand at $1.0300. It faces trendline resistance at $1.0370, ahead of $1.0400. The U.S. dollar was on the defensive against the yen, having skidded to 77.10 yen on Friday, its lowest since Japan's Oct. 31 intervention. It stood at 77.13. Appearing to support Japan's recent currency intervention aimed at curbing excess volatility, the head of the International Monetary Fund said on Saturday the move was in line with the spirit of the G7 and G20. But traders said interventions, particularly unilateral actions such as Japan's latest moves, are unlikely to have a long-term impact and the dollar is likely to slip on any signs of problems in the U.S. economy. "The dollar could fall to around 76 yen this week and to 72 yen by the end of year, said Hideki Amikura, forex chief at Nomura Trust Banking, noting that the U.S. yield curve is likely to flatten further given that the Federal Reserve has committed itself to keeping rates low until 2013. "If the U.S. PPI (producer price index) is weak, that suggests recent strength in U.S. retail sales is due largely to price cuts, not strong demand," he said. Some traders also said the market is starting to look at the U.S. congressional "super committee", which is at a difficult point in negotiations on a deficit-reduction deal, before its deadline on Wednesday next week for such a deal.

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