The euro won a reprieve on Thursday, holding on to its big gains made the previous day as Italy moved to calm political turbulence and sought to avoid a potentially disruptive early election.

Italian Prime Minister-designate Carlo Cottarelli said possibilities had emerged “for the birth of a political government,” suggesting politicians, rather than technocrats like himself, might be able to steer the country out of deadlock. That has eased fears that fresh Italian elections could strengthen the hand of anti-establishment parties, helping to bring down Italian bond yields after they spiked sharply on Tuesday

The euro traded at $1.1669, having risen 1.1 per cent the previous day, its second-biggest daily gain so far this year. It had hit a 10-month low of $1.1510 on Tuesday. “As the Italian bond spreads have shrank, the euro is being bought back. But the situation still looks murky and it is far from certain whether the euro's recovery becomes full-fledged,” said Naoya Oshikubo, strategist at Barclays.

The two-year Italian government bond yield fell to 1.75 per cent on Wednesday from 2.71 per cent the previous day. While the calmer mood around Italy helped to knock the yen off its five-week high hit on Tuesday, many investors are also wary of potential escalation in trade frictions.

The Wall Street Journal reported on Wednesday the United States will announce plans to impose tariffs on steel and aluminium from the European Union, citing people familiar with the matter.

The negotiation between the United States and China appears to be intensifying as China said on Wednesday it was ready to fight back if Washington was looking for a trade war, days ahead of a planned visit by US Commerce Secretary Wilbur Ross. China's warning came after the United States on Tuesday threatened it will go ahead with tariffs on $50 billion of imports from China unless it addressed the issue of theft of American intellectual property.

“Last year the world's trade volume posted strong growth and that drove the globally synchronised growth. But if global trade is to slow down on protectionism, that is going to have a major impact. That possibilities should not be ignored,” said Minori Uchida, chief currency strategist at MUFG Bank.

The dollar shed 0.3 per cent to 108.60 yen on Thursday morning, edging back towards Tuesday's five-week low of 108.115 yen. Month-end dollar selling by Japanese exporters is also seen as behind the dollar's fall, market players said.

Elsewhere the Canadian dollar jumped after the Bank of Canada but dropped cautious language about future rate moves in a signal that higher borrowing costs could come as soon as its next meeting in July. The Canadian dollar rose 1.1 per cent on Wednesday and last traded at C$1.2887 per U.S. dollar, off Tuesday's ten-week low of C$1.3047 to the dollar.

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