The euro rose against the dollar on Thursday a day after its steepest sell-off in 15 months on relief that an Italian bond sale did not result in yields above 7 percent, easing fears of a debt crisis in the eurozone's third largest economy. Signs of political progress as Rome moved closer to a national unity government also helped stabilise Italian bond yields, which had soared this week to record highs above 7 percent, a level widely deemed unsustainable.
Sentiment remained negative, however, as uncertainty remained over the selection of a new leader in Italy and whether the new government can implement painful economic reforms. The options market showed an increase in the level of bearishness on the euro."We are still pretty bearish on the euro," said John Doyle, currency strategist at Tempus Consulting in Washington. "Nothing in Italy yet has been passed or approved and there's no real sign of any progress. Overall, we expect more bad news before a final solution."
Italy paid its highest yield in 14 years to sell 12-month debt on Thursday, and although there was relief the sale went smoothly, worries remained that Italy's borrowing costs were unsustainable. Gross yields at the auction on Thursday jumped to 6.09 percent. The country could face a more rigorous test when it sells up to 3 billion euros of five-year bonds next week.
The euro last rose 0.4 percent to $1.3601, after hitting a session high of $1.3652, according to Reuters data. It tumbled 2.1 percent against the dollar on Wednesday, its biggest drop since August 2010. "We suspect that part of the euro's gains today reflects profit-taking ahead of a long US weekend," said Vassili Serebriakov, currency strategist at Wells Fargo in New York. "It should, however, remain a 'one step forward, two steps back' environment for the single currency."
US bond markets will be closed on Friday in observance of the Veterans Day holiday. The US stock market will remain open. One-month implied volatility - a gauge of market expectations of the euro's moves versus the dollar - rose to a one-month high around 16.50 percent from a low of 14.00 percent the previous session.
One-month risk reversals in euro/dollar rose as high as 4.58 in favour of euro puts, from 4.25 on Wednesday, suggesting investors are betting on more weakness in the pair. Against the yen, the euro was up 0.2 percent at 105.60. The dollar fell 0.2 percent to 77.62 yen.