FOREX-Yen, sterling slip, euro vulnerable to Italian elections
* Yen hit by news that two doves likely chosen to lead BOJ
* Euro upside seen capped by Italy elections
* UK rating downgrade pushes sterling to multi-month lows
* Currency speculators turn long dollars
LONDON, Feb 25 (Reuters) - The yen fell to a 33-month low against the dollar on Monday on speculation the Japanese government is likely to name two strong supporters of aggressive monetary easing to top posts at the central bank.
Sterling, meanwhile, slumped to multi-month lows against the dollar and the euro after the UK lost its prized triple-A credit rating, though the single currency remained vulnerable to uncertainty about the election outcome in Italy.
Tokyo is set 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.
"Both those candidates are in favour of more aggressive BOJ easing and that is weighing upon the yen," said Lee Hardman, currency economist at Bank of Tokyo Mitsubishi.
"The yen will remain on the weakening bias. 95 yen is the key level of resistance and if we break above that we will be trading in the 95-100 yen range, which has been identified by some Japanese officials as a more desirable level for the yen."
The dollar shot up to 94.77 yen on Monday, reaching highs not seen since May 2010 and up from 93.39 yen late in New York on Friday.
Option barriers at around 95 yen capped the dollar's gains and the U.S. currency was last trading at 94.02 yen, up 0.7 percent on the day.
Some strategists, however, said the yen would probably now fall more gradually given the dollar has already gained nearly 20 percent against the Japanese currency in the past three months on expectations of BOJ easing.
"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 125.36 against the yen, but below its 34-month peak of 127.71 set early this month. It last stood at 124.41 yen, up 1.0 percent on the day.
The single currency was also up about 1.0 percent against sterling which lost ground against major currencies after Moody's cut Britain's rating by one notch to Aa1 from Aaa, citing weak prospects for economic growth.
Sterling slumped to a 16-month low versus the euro of 87.75 pence per euro and 31-month low against the dollar of $1.5073 and was likely to remain vulnerable on expectations the Bank of England could expand its quantitative easing further to bolster the fragile UK economy.
ITALY IN FOCUS
Against the dollar, the euro was up 0.3 percent on the day at $1.3231, slightly 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.
Traders said buyers would emerge on dips mainly around $1.3150, which could act as support for the single currency.
Italian exit polls will be published shortly after polls close at 1400 GMT on Monday. Full official election 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.
"Uncertainty surrounding the Italian elections also limited enthusiasm for the euro," analysts at Lloyds Bank said in a note.
"Reports overnight suggest the outcome remains too close to call ... This should keep the euro on the back foot today, and $1.3250 looks likely to provide some initial resistance."
Falls in the yen and sterling helped push the dollar higher against a basket of major currencies. The dollar index rose to its highest since early September to 81.642.
Currency speculators turned long on the U.S. dollar for the first time since early December and increased their bets against the Japanese yen in the week ended Feb. 19.
Doubts over just how long the U.S. Federal Reserve will keep its bond-buying programme in place is helping the dollar.
Some in the markets however still think U.S. Federal Reserve Chairman Ben Bernanke does not plan to unwind stimulus any time soon. Strategists said Bernanke's testimony to the Senate on Tuesday would be vital in determining the overall direction of the dollar.