By Richard Leong
NEW YORK (Reuters) - The euro and sterling rose on Wednesday, underpinned by optimism for a Brexit deal, while the dollar lost ground against a basket of currencies even as U.S. bond yields hovered at multiyear peaks.
The common currency's gains were limited by worries about the sustainability of Italy's public finances, though Italian Economy Minister Giovanni Tria reiterated on Wednesday that the government would do everything in its power to regain the confidence of financial markets.
"There is more optimism that they will find some agreement between Britain and (the) European Union before Brexit," said Steve Englander, global head of G10 FX research at Standard Chartered Bank in New York.
This week, Brexit negotiators have hinted at progress toward terms for Britain to leave the economic bloc in March, which gave investors hope for an orderly departure. Still, caution persists due to scant details.
On Wednesday, EU's Brexit negotiator, Michel Barnier, said the two parties have agreed on much of the withdrawal agreement ahead of a summit of all the bloc's 28 national leaders next week.
Some traders remain skeptical about a final Brexit deal.
"We see a lot of volatility, so the good news may be a temporary thing because the EU has been quick to reject most proposals even if it has the backing of Labour," said Juan Perez, senior currency trader with Tempus, Inc. in Washington.
Perez was referring to the U.K. Labour Party whose spokesman on Wednesday downplayed a news report that some party members would back a Brexit deal that Prime Minister Theresa May supports.
The bounce in the two currencies offset the effects of an increase in U.S. Treasury yields, putting pressure on the dollar.
Benchmark 10-year yields
U.S. yields have increased on rising government debt supply and worries about higher inflation, which may push the Federal Reserve to raise short-term rates more quickly.
The ICE dollar index (.DXY), which tracks the greenback against six major currencies, fell 0.2 percent on the day to 95.480. It hit a seven-week high on Tuesday at 96.155.
(Additional reporting by Tommy Wilkes in London; Editing by Jonathan Oatis and Andrea Ricci)