The euro rose against the dollar on Tuesday after Italian Prime Minister Silvio Berlusconi said he will resign after the new budget law is approved, but the rally could be short-lived. The news encouraged euro bulls, who had seen the departure of the 75-year-old billionaire media magnate, beset by corruption trials and sex scandals, as a precondition for saving Italy's public finances.
Yields on Italian 10-year bonds touched 6.76 percent on Tuesday, approaching dangerous levels that could force the eurozone's third-largest economy to seek a bailout that Europe cannot afford. Analysts, however, said the euro's gains may prove unsustainable as it remains unclear whether a new government would be able to promote growth and implement spending cuts to bring down debt levels. At 120 percent of gross domestic product, Rome's massive debt is the second-highest in Europe.
"I guess it resolved a little bit of political impasse that they had, but it also opens the door to further political disarray in Italy, potentially delaying passage and implementation of austerity measures," said Brian Dolan, chief currency strategist at Forex.com in Bedminster, New Jersey.
"And it does nothing to resolve the conundrum of stagnating growth and massive debt burdens," he added. "Italy still has that major problem to get over and a change in political leadership is not going to resolve that." The euro climbed to a session peak of $1.3847 on Reuters data, and last traded at $1.3836, up 0.5 percent. Traders said if a corrective rally were to gain steam, the euro could target resistance around $1.3930 - the 50 percent retracement of a high $1.4247 hit on October 27 and a low of $1.3608 set on November 1. Strong support lies in the $1.37-$1.3750 area and a fall beneath those levels could lead to a decline toward $1.34.
News that Berlusconi will resign came after he managed to squeeze out a victory in parliament on budget policy, but lost his parliamentary majority. The budget law is expected to be passed by the end of this month, but its passage might now be accelerated.
"Investors want to see very daring action. They're not interested in seeing these political flip-flops that keep happening," said Ravi Bharadwaj, market analyst at Travelex Global Business Payments in Washington. "They just really want this nightmare to be over and are looking forward to some real results."
The euro was 0.2 percent lower at 1.2382 Swiss francs after a Swiss central bank official doused expectations of near-term intervention. SNB Vice Chairman Thomas Jordan said it would be wrong to engage in competitive devaluation and said he sees the franc's cap as an attempt to limit the currency's appreciation to shield the economy. The SNB capped the franc at 1.20 francs per euro in September and vowed to defend that level. The dollar fell 0.6 percent to 0.8950 franc. The US currency also slipped 0.5 percent to 77.67 yen.