Euro Takes Hit on Uncertainty in US and Italy

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Stalemate in the United States over automatic government spending cuts due to take effect March 1 and an inconclusive election in Italy undermined the euro on Thursday, sending it back toward seven-week lows against the U.S. dollar.

The greenback also found support from upbeat economic data showing growth in the fourth quarter of last year, albeit miniscule, after a preliminary report of contraction. Consumer spending rose while weekly claims for jobless benefits declined, contributing to some of the dollar's strength.

In Washington, the hardening positions of U.S. President Barack Obama and opposition Republicans with just hours to go before $85 billion in across-the-board spending cuts kick in spurred investors — perhaps ironically — to seek the safety of the U.S. dollar.

"Given past experience, many investors have clung to hopes that Washington might strike an 11th-hour deal to avoid the big spending cuts or cobble together a plan in the coming weeks to blunt the impact on the economy," Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington.

The International Monetary Fund said it will likely cut its growth forecasts for the United States and the global economy if the spending cuts do take effect. It warned that the United States' biggest trading partners would be hardest hit.

In Italy, a protest vote has produced the worst possible result for its stagnant and recession-hit economy as it is expected that any coalition government formed will be short-lived. That will not expunge deep concerns about sustained instability in the euro zone's third-largest economy possibly reigniting Europe's debt crisis.

Due to the size of the Italian economy, the European Central Bank may offer support should the debt crisis take a turn for the worse.

Month-end flows made for choppy price action, with the euro poised to end February about 3.8 percent lower against the dollar, which would mark its worst monthly performance since last May.

The euro last traded at $1.3062, down 0.57 percent on the day, but still above the session low $1.3054.

The euro held above a near eight-week low of $1.3017 hit on Tuesday after the inconclusive Italian elections. Options barriers ahead of $1.3160 could limit any gains.

"I think there is interest in selling euro on concerns about growth and Italy," said Alvise Marino, currency strategist at Credit Suisse in New York. Marino is less convinced of the dominance of safe-haven flows for the greenback given the narrow range of the moves.

Some market players expect the euro to remain range-bound over the next few weeks while awaiting more clarity on Italy. Strong support was seen around the 2013 low of $1.2997, touched in early January.

Improved US Data

The dollar briefly reacted to data showing anemic U.S. economic growth in the fourth quarter, although a slightly better performance in exports and fewer imports led the government to scratch an earlier estimate that the economy had contracted.

The government also reported a drop in new U.S. claims for unemployment benefits last week, adding to a string of data that suggests the economy improved early this year.

Against the Japanese yen, the dollar last traded at 92.61 yen, up 0.4 percent on the day, according to Reuters data.

The euro last traded at 120.86 yen, or down 0.22 percent on the day, but above a five-week low of 118.74 yen set on Monday.

The yen showed little reaction after Japan's prime minister, as expected, nominated Haruhiko Kuroda, president of the Asian Development Bank, as governor of the Bank of Japan and academic Kikuo Iwata as one of the bank's two deputy governors.

Japan's parliament is expected to approve the nominations, clearing the way for the central bank to unveil fresh easing steps in April, which could add to selling pressure on the yen.

The greenback is poised to end February about 1 percent higher against the yen, notching its fifth straight monthly gain.

The dollar has risen steeply against the yen since November, hitting a 33-month high of 94.76 yen on Monday, according to Reuters data.