* Bund future on track for biggest weekly fall in two months
* Italy, Spanish bonds steady, fresh debt sales eyed
* Expectations of Japanese buying support periphery
By Emelia Sithole-Matarise
LONDON, May 10 (Reuters) - German Bunds fell to their lowest in over a month on Friday, in line with a selloff in U.S. and Japanese bonds triggered by the dollar's sharp rise against the yen.
Traders said the dollar's rise to a 4-1/2 high of 101.66 yen had prompted selling of Treasuries and Japanese bonds by investors who needed to hedge some structured deals, and Bunds were caught in their downdraft.
Demand for safe-haven bonds has been undermined this week by forecast-beating data in the United States and in Germany. But traders said the sell-off in Bunds was likely to fizzle out in coming days due to bets the European Central Bank would ease monetary policy after it cut interest rates last week.
Bund futures, which hit a record high of 147.20 last week, fell more than a point on the day to 144.84 and were on course for their biggest one-week fall since March 10. The slide gained momentum after a break below the week's low of 145.37, which traders said had provided support.
"It is a follow-on from what happened overnight in the U.S. and Japan. It is nothing fundamental, it is probably just a correction because they were getting really expensive, but we're closing in on support at 144.80," one trader said.
German 10-year yields were 7.5 basis points higher at 1.34 percent. They have risen some 20 bps over the past week as upbeat U.S. jobs data, and stronger-than-forecast German industrial output figures halted a post-ECB rally.
Another trader said the sharp rise in German yields was starting to lure back some investors, especially in five-year maturities. Five-year yields were up 5 bps at 0.38 percent, a level which some in the market said had attracted domestic and overseas buyers in recent days.
The 10-year yield gap between Bunds and Treasuries was steady on the day around 54 bps after the benchmark U.S. yield rose to its highest since early April, around 1.862 percent.
Among lower-rated euro zone bonds, Spanish 10-year yields were slightly up at 4.22 percent. They rose as much as 10 bps on Thursday on speculation Spain planned to issue more debt via syndication in the coming week after a well-received sale.
Some traders were nervous the market could find it hard to digest such a flood of new debt in so short a time.
Italy also plans to issue up to 8 billion euros in conventional and floating rate paper on Monday. Analysts said that while traders might sell to make way for the auction, underlying demand for higher-yielding euro zone debt supported by the prospect of loose monetary policy should persist.
"The hunt for returns is still very much intact and the very low yields in core bonds is still driving investors to peripherals so I still expect Italian and Spanish spreads to tighten against Bunds," said Alessandro Giansanti, a strategist at ING in Amsterdam.