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Euro on Tentative Rebound as Cypriot Banks Reopen

Thursday, 28 Mar 2013 | 4:10 PM ET

The euro rebounded from a recent four-month low against the dollar on Thursday, a trend that analysts see as tenuous because investors continue to fret about the ramifications of the Cyprus crisis and political concerns in Italy.

Month- and quarter-end flows had investors covering bets against the euro as Cypriot banks re-opened for business for the first time in two weeks under tight controls to prevent a run on deposits.

(Read More: Cyprus Banks Reopen, Under Tight Controls)

Although these measures prevented a rush of flows out of Cypriot banks, some analysts said curbing the free flow of cash in Cyprus was bad for the bloc.

The euro at current prices is poised to end the first quarter notching a roughly 3 percent loss against the dollar, its first decline since the second quarter of 2012.

The single currency shared by 17 countries has lost about 1.9 percent of its value in March, its second straight monthly loss.

The euro hit a four-month low on Wednesday as the deal in Cyprus, where depositors and private bondholders are left with huge losses, instead of taxpayers, had investors fearing it could be used as a blueprint for future bank bailouts for struggling euro zone countries.

Capital controls within the European Monetary Union is a historic and negative event and shifts the fundamental core of the economic and monetary union, according to Camilla Sutton, chief currency strategist at Scotiabank in Toronto.

"Leading into the long-weekend we are likely to see some position squaring, which combined with potential passive equity related euro buying, could cause temporary support for the currency," she said. "However, we expect that this will prove fleeting."

U.S. financial markets will be closed on Friday in observance of the Good Friday holiday.

The euro last traded up 0.4 percent on the day at $1.2819, within site of a four-month low of $1.2750 hit Wednesday. Traders said month-end demand from investors rebalancing their bonds and stocks portfolio would offer it some support, but any bounce towards Wednesday's high of $1.2867 could see fresh selling.

Concerns about Cyprus, along with ongoing political uncertainty in Italy, and a weak economic outlook across the euro zone should keep the euro pinned down, analysts said.

"Economic and Monetary Union across the entire euro zone no longer exists. Even though the country (Cyprus) is very small, policymakers' willingness to suspend cross-border euro convertibility is a meaningfully negative signal for the euro zone," said George Saravelos, FX strategist at Deutsche Bank in a note.

Apart from worries in Cyprus, political confusion in Italy saw its borrowing costs rise on Wednesday and hurt the euro. Italy's center-left made a last-ditch appeal to other parties on Thursday to clear the way for a new government before its leader, Pier Luigi Bersani, reports back to President Giorgio Napolitano later in the day.

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Yen Steady

Given the ongoing problems in the euro zone, investors chose the safety of the more liquid yen.

The euro was nearly flat against the yen at 120.67 yen, recovering slightly from a one-month low of 119.71 hit earlier in the day.

The yen also gained on talk of repatriation flows by Japanese investors before the end of the financial year on March 31. That gave the currency a reprieve after it saw a period of sustained weakening due to expectations—now heavily priced in—of aggressive monetary easing by the Bank of Japan at new governor Haruhiko Kuroda's first policy review on April 3-4.

(Read More: BOJ's Kuroda Says Asset Purchase Limit Already Broken)

Some analysts say given high expectations of aggressive easing from the Bank of Japan, there is a risk of disappointment. That could give the yen a boost toward the 95 yen level after the BOJ policy meeting.

The dollar last traded at 94.11 yen, down 0.3 percent on the day, according to Reuters data. The dollar briefly extended losses after data showed the number of Americans filing new claims for unemployment benefits rose more than expected last week.

(Read More: Not-So-Great News for Jobless Claims and GDP)

Separate data showed the U.S. economy expanded at a sluggish pace in the fourth quarter although a big gain in business investment and higher exports of services led the government to push up its previous estimate for growth.

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