By William L. Watts and V. Phani Kumar, MarketWatch

FRANKFURT (MarketWatch) -- The euro rallied Monday as traders awaited the conclusion of Italy's bitterly contested general election, while the British pound foundered after ratings firm Moody's Investors Service late last week stripped the U.K. of its AAA credit rating.

Meanwhile, the Japanese yen bounced back from an earlier loss that followed news reports that a longtime Bank of Japan critic and pro-stimulus advocate is in line to head the central bank.

Overall, hopes for a market-friendly outcome in Italy and more stimulus in Japan helped fuel a global rally in stocks, leaving investors to shun the safe-haven dollar. .

The gyrations left the ICE dollar index (DXY) -- a measure of the greenback against six other major currencies -- at 81.154, down from 81.454 in North America on Friday.

The WSJ dollar index , which captures the currency's moves versus a slightly wider basket of rival units, slipped to 72.40 from Friday's close of 72.55.

The euro (EURUSD) extended gains Monday as voting in Italy's general election winds down. Polls close at 9 a.m. Eastern, with initial exit polls expected shortly after.

The euro traded as high as $1.3304 and changed hands at $1.3299 in recent action, up from $1.3182 in North American trade late Friday.

A best-case scenario for the market would see a center-left coalition that includes technocratic Prime Minister Mario Monti, analysts said, while an inconclusive result or a strong showing by former premier Silvio Berlusconi could unsettle markets.

"The market reaction is short-covering, for both [Italian government bonds] and the euro. A partnership [between Monti and Democratic Party leader Pier Luigi Bersani] is the most positive of the realistic outcomes and probably what the market is now positioned for," said Kit Juckes, head of forex at Société Générale. .

The British pound (GBPUSD), which had tumbled late Friday after Moody's Investors Service cut the U.K.'s sovereign ratings to Aa1 from Aaa, extended its slide on Monday. The pound fetched $1.5139, down from $1.5245 Friday before Moody's ratings action. .

BK Asset Management managing director Kathy Lien said Moody's ratings downgrade of the U.K. adds to the growing number of reasons for the sterling to stay under pressure. She said the psychologically significant level of $1.50 could serve as near-term support, while the March 2010 and May 2009 lows around $1.4755 appear to be a "more important level."

"However, traders should also be mindful of the fact that the [British pound] is a very volatile currency pair that can experience large intraday swings," Lien said.

The dollar (USDJPY), which rose as high as Yen94.76 earlier in the day, changed hands at Yen93.95 in recent action versus Yen93.43 late Friday afternoon in New York.

The euro (EURJPY) was at Yen125.03, pulling back after briefly rising as high as Yen125.34, but still almost two full yen above Friday's level of Yen123.12.

The yen had fallen sharply following weekend reports in Japanese media that Haruhiko Kuroda would win Tokyo's backing to be the next governor of the Bank of Japan, when incumbent Masaaki Shirakawa steps down on March 19.

Kuroda, currently president of the Asian Development Bank, has previously been quoted as saying that the Japanese central bank's monetary easing has been too timid in the face of deflationary pressures.

Reports of his nomination came against the backdrop of Japanese Prime Minister Shinzo Abe's efforts to push the central bank to help boost growth, and to adopt more aggressive policies to pull the country from an era of falling prices.

"Compared with other [Bank of Japan] governor candidates,...Mr. Kuroda is clearly more dovish than Mr. Muto. The announcement can be regarded as less positive for [the dollar's rate against the yen] than the nomination of Kazumasa Iwata," Nomura strategists led by Yujiro Goto wrote in a note. Iwata, a critic of Bank of Japan policy, is expected to be named as a deputy governor of the central bank, according to Crédit Agricole.

"All told, the Kuroda nomination will be a slight positive for [the dollar against the yen], in our view, perhaps worth a move of around 1% from Friday's close," the Nomura analysts said.

They added, however, that the situation could change, as there was still no official announcement from the government.

Among other major currency pairs, the Australian dollar (AUDUSD) was at $1.0278, down from $1.0327 late Friday.

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  02-25-130845ET
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