CORRECTED-FOREX-Yen & sterling slump, euro eyes Italy elections

Mon Feb 25, 2013 2:48am EST

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(Corrects the milestone in paragraph 2 to a 31-month low)

* Yen hit by news that two doves chosen to lead BOJ

* Sterling weighed by Moody's downgrade of Britain

* Euro flat, but upside seen capped by Italy elections

* Aussie falls after soft China data

* Dollar/yen up 0.8%, cable down 0.2%, Aussie -0.4%

By Hideyuki Sano and Ian Chua

TOKYO/SYDNEY, Feb 25 (Reuters) - The yen skidded to a 33-month low against the dollar on Monday as speculation strengthened that the Japanese government is set to name two strong supporters of aggressive monetary easing to top posts at the central bank.

Britain's sterling also lost ground against major currencies, slipping to a 31-month low versus the dollar, following Moody's downgrade of the country's prized triple-A sovereign rating late on Friday.

Tokyo plans to nominate Haruhiko Kuroda, a vocal advocate of aggressive monetary expansion, as Bank of Japan governor and Kikuo Iwata, an academic who has criticised the central bank for not taking bold measures to fight deflation, as one of two deputy governors.

"Kuroda is a fan of a weaker yen and of deflation-bashing," said Kit Juckes, strategist at Societe Generale.

The dollar shot up to 94.77 yen , from 93.39 yen late in New York on Friday, reaching highs not seen since May 2010.

"Iwata is a leading anti-BOJ academic and his appointment was the shocker, prompting aggressive yen selling by foreign speculators," said a trader at a Japanese bank.

The greenback gave up some of the gains on heavy selling near 95 yen, some of which is thought be related to hedging activity by option players holding barrier option at that level.

But it was still up 0.8 percent from late U.S. level to stand at 94.22 yen.

As the dollar has risen already nearly 20 percent against the yen in the past three months or so on expectations of BOJ easing, some traders think the pace of the yen's fall will likely slow.

"We are likely to see a more moderate and gradual fall in the yen from here. At the end of the day, whoever leads the BOJ, policy options the bank has are more or less the same," said a trader at a Japanese bank.

The euro jumped to as high as 125.25 against the yen, but remained shy of its 34-month peak of 127.71 set early this month. It last stood at 124.41 yen, up 0.9 percent from late last week.

Traders took aim at sterling as well, pushing it to a 31-month low of $1.5073 and a 16-month low of 0.8775 pound per euro. The pound last stood at $1.5124, down 0.3 percent from late last week.

Moody's cut Britain's rating by one notch to Aa1 from Aaa, citing weak prospects for economic growth. Britain joined the United States and France in having lost its triple-A rating from at least one major agency.

The rating outlook is stable, meaning any further change is unlikely for the next year or so, but the sterling is still seen under pressure because of expectations the Bank of England could expand its quantitative easing further to bolster the fragile UK economy.

The pound's implied volatilities have risen sharply in recent weeks, with the one-month volatility rising to its highest level in eight months.

ITALY ELECTION

As the yen and sterling fell, the dollar's index against a basket of major currencies rose to its highest level since early September. The dollar index rose to as high as 81.642.

Some traders say doubts over just how long the U.S. Federal Reserve will keep its bond buying programme in place are helping the dollar, even though many market players still think Chairman Ben Bernanke has no plans to unwind stimulus any time soon.

Given such concerns, Bernanke's testimony to the Senate on Tuesday is seen as a vital factor in determining the overall direction of the dollar as well as broader financial markets.

Against the dollar, the euro held almost flat at $1.3200 , a tad above a six-week low around $1.3145 hit on Friday, but its further upside is seen limited for now as investors eye an unpredictable election in Italy.

Exit polls will be published shortly after polls close at 1400 GMT on Monday. Full official results are expected by early Tuesday.

A weak government could usher in new instability in the euro zone's third largest economy and cause another crisis of confidence in the European Union's single currency.

The Australian dollar took a beating after the HSBC's China flash purchasing managers' index (PMI) for February slipped to 50.4, the lowest in four months, suggesting growth in the country's giant manufacturing sector pulled back from two-year highs hit in January.

The Aussie is highly sensitive to news out of China which is Australia's top export market. It fell 0.4 percent to $1.0275 , edging closer to a four-month low of $1.0221 hit last week. (Reporting by Hideyuki Sano; Editing by Sanjeev Miglani)

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