LONDON: The euro rose against the dollar on Monday, lifted by the formation of a government in Italy, but was held in check by expectations of a rate cut by the European Central Bank.
Demand for bonds from the more indebted euro zone countries helped buoy the currency after centre-left politician Enrico Letta took over as Italy's prime minister, ending a deadlock.
The euro was up 0.5 percent on the day at $1.3095, with hedge funds cited as main buyers. Strategists said sellers would probably emerge around the $1.3100 level, where there are also reported option expiries.
"Investors are trying to balance two risks: a further reduction in peripheral bond yield spreads which is euro positive, and the prospects of further easing by the ECB which historically has proven to be euro negative," said Valentin Marinov, head of European G10 FX strategy at Citi.
There are broad market expectations the ECB will cut rates to 0.5 percent from 0.75 percent at its policy meeting on May 2 to support the euro zone's recession-hit economy.
The dollar fell broadly as traders reduced exposure to the United States after data last week showed the economy grew at a slower-than-expected pace in the first quarter.
It dropped 0.3 percent versus the yen to 97.75 yen, edging away from a four-year high of 99.95 yen set earlier in April when the Bank of Japan announced major monetary stimulus.
Although the dollar has faced stiff resistance at 100 yen in recent weeks, many market players expect the greenback to head higher versus the yen over the medium term due to the BOJ's aggressive monetary easing.
The Federal Reserve holds a two-day policy meeting, starting on on Tuesday. The closely watched jobs report is on Friday.
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