FOREX-Portugal tension drags euro to 5-week low versus dollar
* Political tension in Portugal weighs on euro, lifts yen
* Euro hits 5-week low versus dollar, falls 1.4 pct vs yen
* Expectations Fed will reduce stimulus support dollar
* U.S. private payrolls data at 1215 GMT in focus
LONDON, July 3 (Reuters) - The euro hit a five-week low against the dollar and fell sharply against the safe-haven yen on Wednesday after political tension in Portugal pushed up the borrowing costs of lower-rated euro zone countries.
The euro fell to $1.2923, its lowest since late May. It was last down 0.15 percent at $1.2958.
"Portugal is by far the biggest focus," said Derek Halpenny, European Head of Global Currency Research at BTMU.
"For the euro this is a slow grind lower ... The euro has been fairly resilient against the dollar and the market will initially treat this with caution but it is clearly a euro negative."
More euro losses would take it towards the mid-May low just below $1.28, although analysts said traders may be cautious about selling the currency aggressively before a European Central Bank policy decision on Thursday.
"I don't think the euro will suffer too much heading into the ECB ... Euro/dollar is in a range around $1.29 to $1.31 and it will keep that before the ECB," said Geoffrey Yu, currency strategist at UBS.
Portuguese 10-year bond yields topped 8 percent and equities slid as media reports said two more government ministers were ready to resign after the finance and foreign ministers quit earlier this week.
Spanish and Italian yields also rose on worries the euro zone was set for a new flare-up.
The euro fell 1.4 percent against the safe-haven yen to 128.78 yen on the EBS trading platform.
DOLLAR AWAITS DATA
Euro weakness against the yen helped push the dollar down 1.2 percent to 99.45 yen. But analysts said a solid non-farm payrolls report on Friday would push the U.S. currency back up. U.S. private payrolls figures due at 1215 GMT could also give the dollar a lift.
"We would still buy dollar/yen on dips," said UBS's Yu.
The dollar index, which measures the currency's value against a basket of currencies, was last down 0.15 percent at 83.40, off an earlier five-week peak of 83.717.
Traders were cautious before a U.S. market holiday on Thursday that could spark volatile movements due to low volumes.
However, expectations the Federal Reserve will scale back stimulus while other central banks are more likely to ease policy were expected to support the dollar.
The higher-yielding Australian dollar slid to a near three-year low of $0.9052 after Reserve Bank of Australia Governor Glenn Stevens said he was surprised by the resilience of the currency.
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