By William L. Watts, MarketWatch
FRANKFURT (MarketWatch) — The U.S. dollar edged higher versus most major rivals Monday, with the euro extending weakness after a sale of five-year Italian government bonds and concerns a new technocratic government in Rome still faces daunting challenges in insulating the euro-zone’s third-largest economy from the region’s debt crisis.
The euro EURUSD -1.06% slipped to $1.3668, from $1.3745 in North American trade late Friday.
The euro bounced back from a mid-week rout last week on hopes that a government led by economist and former European Commissioner Mario Monti would be able to implement austerity measures and economic reforms. The changes were demanded by Italy’s European partners and designed to reassure investors that the country can rein in its debt load.
Monti is working to assemble a government after Silvio Berlusconi formally resigned over the weekend.
“At this stage, even though the Italian political transition has proven to be orderly, and the likely new Monti-led technocratic government appears to enjoy broad-based support, ... investors are acknowledging that a change of government may not automatically translate into immediate improvements in Italy’s overall debt situation,” said Geoffrey Yu, currency strategist at UBS. “The resulting uncertainty still favors investors maintaining short positions in the euro.”
Still, demand rose at Italy’s auction of €3 billion of five-year government bonds. The auction produced a yield of 6.29%, a sharp rise in borrowing costs from a 5.32% yield in a sale of the same issue last month. Bids exceeding supply 1.47 times versus 1.34 times in October.
Yields across the Italian curve spiked above the 7% level at mid-week last week amid political turmoil and a hike in margin requirements before drifting back down to still-elevated levels.
Yields resumed a rise following the five-year auction, with the five-year yield IT:5YR_ITA +3.24% up 18 basis points at 6.53% and the 10-year yield IT:10YR_ITA -2.42% rising 27 basis points to 6.60%, according to FactSet Research.
The dollar index DXY +0.62% , which tracks the U.S. unit against a basket of six major rivals, rose to 77.317 from 76.947.
Reduced risk
“While the U.S. economic data has improved, the Greek and Italian political developments have reduced a lot of the tail risk in the euro and suggest short positioning may consequently be reduced,” wrote strategists at Lloyds Bank in London.
The dollar tends to rise on safe-haven flows as risk aversion increases, while falling when investors show more risk appetite.
The British pound GBPUSD -0.87% traded at $1.5945, down from $1.6058.
The dollar slipped to 77.01 Japanese yen USDJPY -0.38% from ÂĄ77.17 on Friday.
