* 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 The euro edged up on Friday but
stayed near four-month lows against the dollar, beset by
political deadlock in Italy and worries the huge losses suffered
by Cypriot depositors as part of a bailout could unnerve
investors in other euro zone debt.
But trade was 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 stood at $1.2830, up 0.1 percent
from late U.S. trade. It was set to end the quarter down roughly
2.7 percent against the dollar, its first quarterly decline
since the April to 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. There were also signs that dip-buying could prevent
any sharp falls for now.
"Some U.S. hedge funds are trying to take long positions on
the euro on the dip," said a trader at a domestic bank who
declined to be named.
However, the common currency still faces vigorous headwinds.
There is 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 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.
"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
In a sign nervous investors are shifting funds back to
safe-haven German bonds, the 10-year German Bund
yield fell to its lowest since July last year, when borrowing
costs for Spain and Italy rocketed to levels seen as
The draconian bailout conditions for Cyprus have soured
investor sentiment particularly in Slovenia, which is seen as
one of the next potential candidates for a future euro zone
bailout due to the bad loans hampering its banking sector.
Slovenian government bond debt yields have
jumped over 100 basis points in the last week or so.
The small bounce for the euro helped pull the dollar further
from Wednesday's eight-month high of 83.302 against a basket of
currencies. The dollar index lost 0.4 percent to 82.906
The greenback also slipped 0.1 percent against the yen to
94.07 as the last of Japanese exporters' repatriation
flows trickled through on the last trading day of the financial
Expectations of gutsy easing from the Bank of Japan at its
monetary policy review next week have left the yen poised to
record an 8.4 percent quarterly loss against the greenback,
which would mark a slide for two quarters in a row for the first
time 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, including
disappointing industrial output.
Market players expect Kuroda to scale up BOJ bond buying
and extend maturities of bonds it purchases.
But some analysts say there is a risk of disappointment.
"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.