FOREX-Euro falls on political and growth uncertainty
* Euro pulls away from two-week high vs dollar
* Euro may stall ahead of heavy political, debt auction schedule
* Yen rebounds, specs' short positions remain high
By Anirban Nag
LONDON, April 23 (Reuters) - The euro retreated from two-week highs against the dollar on Monday, and was likely to stay under pressure on concerns the euro zone debt crisis could spread to higher-rated countries, economic slowdown and rising political risks.
Analysts said sentiment towards the common currency was bearish with most investors looking to sell it at higher levels before debt auctions this week in Italy and the Netherlands.
The Dutch government was on the verge of collapse after it failed to agree on budget cuts while Italian bond yields surged as did French borrowing costs rose after Socialist Francois Hollande - who has promised to renegotiate a European budget pact - won the first round of France's presidential poll.
The euro fell 0.6 percent to $1.3140, below Friday's peak of $1.3225 after a near 1 percent rally last week, its best since late February. Traders cited sell-stops below $1.3130 with near-term support at its 100-day moving average around $1.3120.
Most traders expect the euro to trade in a roughly $1.3000 to $1.3300 range with worries about feeble euro zone growth, likely to dominate sentiment. Data showing Germany's manufacturing sector shrank unexpectedly at its fastest pace in nearly three years in April, dragged it lower.
"It has not been a great start for the week for the euro with German PMI numbers adding to the worries stemming from the political risk factors," said Jeremy Stretch, head of currency strategy at CIBC World Markets.
"If bond spreads continue to widen and stock markets come under more pressure, we could see the euro drop towards $1.3050 rather than head towards $1.3250 in the near term."
The euro got limited support from a weekend deal to double the International Monetary Fund's firepower to contain the debt crisis.
Analysts said the French election first round results could raise doubts about whether euro zone states will stick to austerity measures and could push sovereign debt yields higher.
The French run-off coincides with a parliamentary election in Greece, where support for the two main pro-bailout parties is at historic lows, though they could eke out a narrow majority.
And the Netherlands, a core euro zone member, was set to face new elections after talks on budget cuts collapsed over the weekend.
That saw the yield spread on the triple-A rated Dutch bonds over German paper rise to its highest in three years while the Italian debt yield spread also widened. Both the Netherlands and Italy hold bond auctions on Tuesday.
The pullback in the euro saw the dollar index rise to 79.435. The dollar could gain further if Federal Reserve policymakers bring forward their projection on when the Fed should start raising interest rates at its two-day policy meeting starting on Tuesday.
But that is far from assured as Chairman Ben Bernanke will probably try to quash any speculation about an early rate hike and possibly leave the door open for more stimulus.
The dollar shed 0.6 percent against the yen to trade at 81.03 yen. But yen gains were seen limited before a Bank of Japan policy meeting on Friday, which is expected to adopt fresh easing steps.
Traders said the yen's bounce proved strong due in part to options-related buybacks. Data published late on Friday by a U.S. financial watchdog showed speculators' net yen positions remained high, raising caution about a possible pullback.
"Looking at the data, I feel that dollar/yen needs to fall before testing higher," said a trader at a U.S. bank in Asia.