REFILE-FOREX-Euro slides on French political woes, weak German data

Mon Aug 25, 2014 11:05pm EDT

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* Speculation of more ECB action drives yields down, hits euro

* Euro falls to lowest in nearly two years on Swiss franc

* Sterling & Aussie show some resilience

By Shinichi Saoshiro and Ian Chua

TOKYO, Aug 26 (Reuters) - The euro plumbed a one-year trough against the dollar on Tuesday as prospects for further easing by the European Central Bank weighed on the currency along with weak eurozone data and the resignation of the French government.

Faced with a host of negative factors the euro dropped as low as $1.3178 before limping back to $1.3200.

Hot on the heels of dovish comments from the head of the ECB, a report released on Monday showed German business sentiment sagged for a fourth month running.

Negative yields further removed support for the common currency.

Speculation the ECB was preparing a programme of asset purchases drove most euro zone government bond yields to record lows on Monday, with Germany's two-year yield dipping to a 16-month low of five basis points below zero percent.

Kyosuke Suzuki, director of forex at Societe Generale in Tokyo, said euro was contending with a bullish dollar while facing its own bearish factors.

Speculation that the Federal Reserve will raise interest rates sooner than expected has boosted the dollar.

"Euro/dollar is vulnerable to testing new lows. A downtrend is easily formed given the opposite directions Fed and ECB monetary policies are seemingly headed... political trouble in France, a core eurozone country, is also a bearish factor," Suzuki at Societe Generale said.

The euro extended its decline against the Swiss franc overnight to almost a two-year low, weakening to 1.2065 francs per euro, with the market close to testing the Swiss National Bank's three-year old pledge to cap its currency at 1.20 per euro.

Investors also sold the euro against the yen and sterling, pushing it to a near one-week low of 137.03 yen and a two-week low of 79.50 pence.

"We expect the broader trend of euro weakness to persist and remain short EURGBP in our recommendations portfolio targeting a decline to 0.76," analysts at BNP Paribas wrote in a note to clients.

They added that data on Friday could show a further decline in the euro zone annual inflation rate to just 0.2 percent.

"This should add to the growing list of potential triggers for further ECB easing and weigh on the euro."

Weakness in the euro helped underpin the dollar index , which remained close to its September 2013 peak of 82.671. A break there will take it back to highs unseen since July last year.

On the yen, the dollar dipped 0.1 percent to 103.92, having peaked at a seven-month high of 104.49 overnight.

Sterling bounced off a five-month low of $1.6501 to last trade at $1.6558, making it one of the best performers against the broadly firmer greenback.

The Australian dollar was also quite resilient, ceding only a bit of ground against the U.S. dollar. It dipped below 93 U.S. cents, but was still well within its 92-95 cent band seen in the past five months.

That support partly reflected the market's preference to buy the Aussie against the New Zealand and Japanese currencies. The Aussie scaled a nine-month peak of NZ$1.1169 and reached a near 15-month high of 97.27 yen on Monday, before pulling back to 96.55. (Editing by Simon Cameron-Moore)

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