The euro rose against the dollar Tuesday after Italian Prime Minister Silvio Berlusconi said he would resign once a new budget is passed.
Italy became a focus of investors who were worried that the country could be engulfed by Europe's debt crisis. Berlusconi's resignation was well received by investors because he was seen as "hampering progress in Italy," said Kathy Lien, director of currency research at GFT. Investors believe it will be easier for Italy to pass economic reforms without him in office.
The euro rose to $1.3835 in late trading Tuesday from $1.3770 late Monday.
Investors also think that Berlusconi's resignation could help calm Italy's bond market. Italy's cost of borrowing spiked to close to 7 percent this week. That number is important because Greece, Portugal and Ireland were forced to receive financial lifelines after their rates rose above 7 percent. Unlike those countries, Italy has too much debt to be bailed out by its European neighbors.
"The 7 percent level is a psychologically hobbling number that will require Italy to pay billions more in interest, something they may not be able to afford without external support," Lien said.
Berlusconi's promise to resign came during a meeting with Italian President Giorgio Napolitano after the prime minister lost his parliamentary majority during a vote earlier Tuesday. Berlusconi said he would resign after a new budget is passed. A vote on the budget is expected to take place next week.
In other trading Tuesday, the British pound rose to $1.6117 from $1.6050 late Monday. The dollar fell to 77.70 Japanese yen from 78.08 yen, to 0.8943 Swiss franc from 0.9013 Swiss franc and to 1.0100 Canadian dollar from 1.0135 Canadian dollar.
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