The euro dipped against the dollar and European shares inched higher on Thursday as nervousness grew ahead of an Italian debt sale that will gauge whether concerns over Spain are spreading to other debt-laden euro zone nations.
Data on industrial production across the euro area, which is likely to show it contracted by 0.3 percent in February, could also reignite fears that weak growth at a time of government austerity measures is undermining efforts to repair the region's finances.
Ahead of the Italian auction the euro fell to a low of $1.3102 before recovering to be steady at $1.1315, below a one-week high of $1.3158 struck on Wednesday, and within the $1.3030-$1.3165 range trodden in the past week.
Should the Italian auction disappoint, we could see the euro reverse some of its gains, said Ankita Dudani, G-10 currency strategist at RBS Global Banking, who expects the bond sale to go through without much of a hitch.
Yields on 10-year Italian bonds were down 3.5 basis points to 5.506 percent in early trading, narrowing the spread over the less risky equivalent German bonds to 381 basis points and indicating fixed income investors are less worried about buying the debt.
Spanish 10-year bond yields were 2.7 basis points lower at 5.85 percent, with traders saying a disappointing Italian auction may be just the push needed for the yields to go back to around the 6 percent seen at the start of the week.
The turmoil in Spain's bond market that pushed the yields up has calmed down substantially following comments on Wednesday from European Central Bank executive board member Benoit Coeure, who hinted that the central bank might be willing to buy the debt from the market.
German Bund futures were slightly higher at 139.89, with 10-year cash yields steady at a near-record low 1.69 percent.
Italy's borrowing costs are expected to rise by about a full percentage point from a month ago at its 5 billion euro auction of new three-year bonds later, after the rate it pays for one-year money more than doubled at an auction on Wednesday.
STOCKS RECOVERY EXTENDS
European equity markets were slightly higher ahead of the Italian bond auction, adding to the previous session's tentative recovery following a week-long slide.
The FTSEurofirst 300 index .FTEU3 of top European shares rose was up 1.83 points, or 0.2 percent, at 1,035.63. The Euro STOXX 50 .STOXX50E index of Europe's blue chip companies gained 0.2 percent to 2,389.45, having suffered a 4.5 percent decline over the last five days that all but eradicated the year-to-date gains.
Globally, the MSCI world equity index .MIWD00000PUS was up 0.2 percent 322.85 after a good start to the U.S. corporate reporting season lifted Wall Street stocks and a strong Australian employment report encouraged the rebound in Asia.
The U.S. dollar was slightly softer against a basket of currencies .DXY following comments by the No. 2 official at the U.S. central bank, Janet Yellen, who said on Wednesday the Federal Reserve's ultra-easy monetary policy was appropriate, given high unemployment and the headwinds facing the economy.
Oil markets were all mostly steady, despite oil sheen spotted near Royal Dutch Shell (RDSa.L) platforms in the central Gulf of Mexico overnight.
Brent crude was up 31 cents at $120.49 a barrel after touching a low of $119.93 in early trade. U.S. oil was up 37 cents at $103.07, adding to $1.68 a barrel gains made on Wednesday.