The euro strengthened from a seven- week low against the dollar as Italian and Spanish bonds trimmed losses on easing concern that inconclusive elections in Italy will deepen Europe’s debt crisis.

The euro advanced versus 12 of its 16 major counterparts as investors bet the European Central Bank will step in to limit any losses in so-called peripheral bonds following Governor Mario Draghi’s pledge in July to safeguard the currency union. The yen weakened on speculation Japan’s Prime Minister Shinzo Abe will select Haruhiko Kuroda, who favors additional stimulus, as the next central bank governor. South Africa’s rand rose as economic growth quickened.

“The political uncertainty in Italy may be euro negative, but it’s not as bad as what happened in Greece,” said Geoffrey Yu, a senior currency strategist at UBS AG in London. “Draghi’s ‘whatever it takes’ pledge is a strong deterrent to a selloff. The market is not ready to challenge him yet. And those who missed the euro rally, especially versus the yen, are trying to get back in.”

The euro gained 0.2 percent to $1.3089 at 7:20 a.m. New York time after dropping to $1.3018, the weakest level since Jan. 7. The single currency advanced 0.4 percent to 120.37 yen. Japan’s currency fell 0.2 percent to 91.97 per dollar.

The 17-nation currency halted losses from Monday amid speculation Democratic Party leader Pier Luigi Bersani and resurgent ex-Premier Silvio Berlusconi will seek to avoid a ballot that would favor populist Beppe Grillo, whose movement was the top vote-getter in its first national contest. No formal steps can be taken until a new parliament convenes March 15.

Italian bonds
 
The yield on Italian 10-year bonds was 32 basis points higher at 4.81 percent after increasing as much as 44 basis points. Similar-maturity Spanish yields trimmed their increase to nine basis points from as much as 43 basis points. A basis point is 0.01 percentage point.

The euro has fallen 1.1 percent in the past month, according to Bloomberg Correlation-Weighted Indexes that track 10 developed-nation currencies. The currency has still gained 1.5 percent this year.

Three-month implied volatility on the euro-dollar exchange rate rose to as high as 9.53 percent, the most since Sept. 7, before being little changed on Tuesday at 9.18 percent.

Yen declines
 
The yen dropped against all except two of its 16 major counterparts on speculation the Bank of Japan will ease monetary policy further to boost growth.

Abe is likely to nominateKuroda as governor for the Bank of Japan, according to two officials with knowledge of the discussions. Kuroda said in a Feb. 11 interview he favors additional stimulus this year, and the central bank has “really substantial room for monetary easing.” The current governor and his deputies will step down on March 19.

“The yen is going to weaken and we are going to see a substantial scaling up of policy easing by the Bank of Japan (8301),” said Ray Attrill, global co-head of foreign-exchange strategy at National Australia Bank Ltd. in Sydney.

The yen has tumbled 16 percent in the past six months, the worst performer of the currencies tracked by Bloomberg Correlation-Weighted Indexes.

Rand gains

The rand rose for a fourth day against the dollar as Statistics South Africa said gross domestic product increased an annualized 2.1 percent last quarter, compared with 1.2 percent in the previous three months.

“Things aren’t necessarily as bad as the market expected,” said Mohammed Nalla, head of strategic research at Nedbank Group Ltd. in Johannesburg. “The market had priced in a much more bearish number.”

The rand is the most undervalued of 34 global currencies and is set for a rebound to 7.80 per dollar by year-end even as the economy faces headwinds, according to HSBC Holdings Plc.

The rand is “one of the most attractive currencies” after depreciating 14 percent in the past year, Murat Toprak, head of emerging-markets currency strategy at HSBC in London, said in a telephone interview on Monday.

South Africa’s currency advanced 0.4 percent to 8.8323 per dollar after climbing to 8.7801, the strongest since Feb. 15.

The Dollar Index (DXY) was little changed before Federal Reserve Chairman Ben S. Bernanke delivers his semi-annual testimony on monetary policy to the Senate Banking Committee on Tuesday.

The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against currencies of six U.S. trading partners, gained 0.1 percent to 81.728.

[Bloomberg]