Worries about Italy & Cyprus take toll on euro

SYDNEY Thu Mar 28, 2013 4:03am IST

A picture illustration taken with the multiple exposure function of the camera shows a one Euro coin and a map of Europe, January 9, 2013. REUTERS/Kai Pfaffenbach

A picture illustration taken with the multiple exposure function of the camera shows a one Euro coin and a map of Europe, January 9, 2013.

Credit: Reuters/Kai Pfaffenbach

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SYDNEY (Reuters) - The euro languished at four-month lows early in Asia on Thursday, having suffered a further setback as a rise in Italy's funding costs weighed on markets already fretting about Cyprus' rescue deal.

The common currency was at $1.2781, having fallen as far as $1.2750. It has lost about 7 percent since peaking at $1.3711 last month and was now targeting the November trough of $1.2661.

Against the yen, the euro dipped to a fresh one-month low around 119.95 before edging back to 120.70.

The euro came under renewed pressure after a debt auction in Italy saw borrowing costs climb to five-month highs as investors demanded more premium in the face of prolonged political uncertainty.

Markets were also nervous as Cyprus prepares to reopen its banks for the first time in nearly two weeks after having secured aid from international lenders.

Fears of a bank run have prompted the government to impose a raft of tough controls including limiting withdrawals and banning cheques.

"Headline risks for the euro should persist, although a positive turn of events in either country would probably come as a greater surprise given the market's subdued expectations," said Vassili Serebriakov, strategist at BNP Paribas.

"Our technical analyst highlights that a break of the $1.2806 technical support level opens the way for a decline to $1.2737."

The setback in the euro saw the dollar index .DXY jump to a near eight-month high. The index, which tracks the greenback's performance against a basket of currencies, was last at 83.215, having touched 83.302.

Against the yen, the dollar was steady at 94.40, still waiting for the Bank of Japan (BOJ) to deliver aggressive easing polices already priced in markets. The dollar has rallied more than 20 percent against the yen since September, hitting a 4-1/2 year high of 96.71 earlier this month.

Sources told Reuters the BOJ is likely to start open-ended asset purchases immediately, rather than in 2014, and consider setting a new target to buy longer-dated bonds at its rate review next week.

The greenback also outperformed commodity currencies as some investors cashed in on recent solid gains ahead of the Easter holidays.

The Australian dollar was at $1.0445, pulling back from a two-month high of $1.0497 set on Tuesday.

Traders said month-end positioning and financial year-end flows in Japan could make for a slightly choppy session as many markets around the world wind down for the Easter break.

There is no major economic news out of Asia on Thursday, leaving the focus squarely on developments in Europe.

(Editing by Wayne Cole)

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