By Richard Hubbard
LONDON (Reuters) - The euro gained against the dollar while German bond prices held steady on Wednesday ahead of Italy's first debt sale since its credit rating was cut due to political uncertainty.
Yields are expected to climb at the sale of up to 7.25 billion euros of new Italian bonds although demand for high yielding assets and the European Central Bank's promise to underpin the euro should limit the rise.
However, the German Bundesbank warned on Tuesday that the euro zone crisis was far from over and some investors remain cautious about the outlook.
"Our view is that these bond yields are going higher at some point. There will be an issue within Europe, within Italy, there will be something that pushes these yields higher," said Patrick Armstrong, managing partner at Armstrong Investment Managers.
Germany also sells new 2-year bonds later in an auction which will reveal whether the Bundesbank comments have added to the appeal of safe haven assets.
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Markets are also waiting for January industrial production figures from across the euro area, after poor German, UK and French data pointed to renewed weakness in the region at the start of the year.
U.S. retail sales data for February will also be key to extending the rally that started after Friday's strong jobs report, which pointed to a solid recovery.
Ahead of the data and the debt auctions, the euro had edged up 0.2 percent against the dollar to $1.3060 though was well within the $1.2955-$1.3135 range seen so far this month.
Against the yen, the euro fell 0.4 percent to $1.2475. The Japanese currency has been under pressure on prospects for much bolder monetary easing from the Bank of Japan but some investors were taking profits after the fall.
European shares edged lower hit by a string of weak earnings reports as investors wait to see if economic data supports the rally that has taken many stock indexes up to multi-year highs.
A subdued showing on Wall Street overnight - where the Dow Jones Industrial Average slipped off a record high to close flat after seven straight sessions of gains - and a sell-off in Tokyo added to the cautious mood in Europe.
The pan-European FTSEurofirst 300 index was down 0.1 percent at 1,193.35 points in early trading, edging away from a 4-1/2 year peak of 1,197.73 points set at the end of last week.
London's FTSE 100, Paris's CAC-40 and Frankfurt's DAX opened down as much as 0.6 percent.
U.S. stock futures had eased 0.1 percent, pointing to a soft Wall Street open, after the Dow Jones Industrial Average marked another record close on Tuesday, its eighth straight day of rises and pushing it higher into overbought territory.
Brent crude oil steadied at 109.65 a barrel while copper prices in London were also little changed at around $7,832.75 a tonne. Spot gold was nearly unchanged at $1,591 an ounce.
(Editing by Anna Willard)