FOREX-Euro edges down on Cyprus worries, Italy political deadlock
* Fears over Italian politics spur flight-to-quality
* Cyprus crisis sends jitters through Slovenian debt market
* No reaction to North Korea sabre-rattling
* Yen shows limited reaction to weak Japan output data
* Focus on BOJ meeting, some see risk of disappointment
By Sophie Knight and Hideyuki Sano
TOKYO, March 29 (Reuters) - The euro hovered near a four-month lows on worries that losses suffered by Cypriot depositors may unnerve investors in other euro zone debt and on Italian political woes, but market participants also said the single currency seems to have found a bottom for now.
Trade was, however, subdued with many markets closed for Easter holidays, and there was limited reaction to North Korea putting its missile units on standby to attack U.S. military bases in South Korea and the Pacific.
The common currency lost 0.1 percent to $1.2805, giving up modest gains earlier in the session. It is down 2.9 percent since January and on course to mark its first quarterly decline since the April-June period in 2012.
The common currency has major support around $1.2680, a 61.8 percent retracement of its July-February rally, though a break there is likely to open the way for a test of last year's low near $1.20.
Market participants said the euro was gaining support from month- and quarter-end positioning, as well as buying on dips from U.S. hedge funds taking long positions.
"Today we have neither strong buying or strong selling pressure, so I think it's close to bottoming out," said Kenichi Asada, manager of forex at Trust & Custody Services Bank.
In Cyprus, banks reopened for the first time in almost two weeks without causing a feared run on deposits, though the country conceded tight capital controls would remain in force longer than expected, likely for about a month.
There was no hint of a breakthrough in Italy's political stalemate, with centre-left leader Pier Luigi Bersani's failure to find a way out of the deadlock prompting President Giorgio Napolitano to go in search of another solution.
In a sign that investors are shifting funds back to safe-havens, the 10-year German Bund yield fell to an eight-month low, while Slovenia's government bond yields have jumped over 100 basis points since last week.
Slovenia is seen as a potential candidate for a future euro zone bailout due to the bad loans hampering its banking sector, according to a Reuters' poll.
"The euro appears to be stabilising just for now, but European bond markets are clearly showing a rather different picture," said Daisuke Uno, chief strategist at Sumitomo Mitsui Bank.
The dollar lost 0.2 percent against a basket of currencies to 83.029, also hurt by a rise in U.S. jobless claims and a pullback in the pace of Midwest business activity. The greenback hit an eight-month high of 83.302 on Wednesday.
The Aussie moved a smidgen higher, adding 0.1 percent to 1.0427 after dropping 1 percent between a two-month high of 1.0497 struck on Tuesday and Thursday's low after a slide in Chinese shares.
"We have a lot of clients who are eagerly watching the Aussie and who want to buy it on this pullback," said Asada of Trust & Custody Services.
The greenback slipped 0.1 percent against the yen to 94.030 as the last trickle of repatriation flows from Japanese exporters tussled with yen bears hoping for an explosive change in monetary policy next week.
Expectations of gutsy easing from the Bank of Japan at its monetary policy review on April 3-4 have left the dollar poised to record an 8.4 percent quarterly gain against the yen, which would mark its first gain for two straight quarters since 2009.
With so much focus on the BOJ's policy meeting on April 3-4, the first one under new Governor Haruhiko Kuroda, the yen showed a muted response to a barrage of Japanese data out on Friday, including disappointing industrial output.
Market players expect Kuroda to scale up the BOJ's bond buying and to extend the maturities of the bonds it purchases. But speculation on the scale and content of that easing has ramped up the risk of disappointment, analysts say.
"I expect the yen to gain after the BOJ meeting next week. So much has been said about aggressive easing already and I can't expect anything new," said Sumitomo Bank's Uno.
The U.S. currency has strong support at 93.78, the kijun line from its daily Ichimoku chart. It has not closed below this line since mid-November, when investors started to bet Japan would pursue aggressive monetary easing.
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