4 Min Read
* Italy election results raise fear of political paralysis
* Euro/dollar near lowest level in more than 6 weeks
* A break of $1.3032 could open way for test of Jan 4 low below $1.30
* Yen up on a long overdue correction - analyst
* Pound near 31-month low ahead of BoE King's speech
By Hideyuki Sano
TOKYO, Feb 26 (Reuters) - The euro crouched near a six-week low against the dollar while the yen kept some distance from multi-month lows on Tuesday after the spectre of political gridlock in Italy spurred traders to seek refuge in the U.S. and Japanese currencies.
Italy's centre left has won the lower house as widely expected but projections by Italian media indicate no party or coalition will be able to form a majority in the upper house or Senate.
A deadlocked parliament could threaten Italy's economic reforms and reignite the euro zone debt crisis, reversing the optimism that the worst of the region's crisis was over, which had benefited the euro earlier this year.
The euro traded at $1.3078 in early Asian trade after having fallen as low as $1.3047 on Monday, its lowest in more than six weeks.
It has support at $1.3032 from the bottom of the daily Ichimoku charts, though a break there is seen as a strong bearish signal and is likely to open the way for a test of its Jan. 4 low of $1.2998.
The common currency tumbled sharply particularly against the yen, having fallen 2.6 percent on Monday, its biggest daily loss since May 6, 2010, when investors were shocked by violent street protests in Greece sparked by austerity measures.
The euro fell to as low as 118.74 yen on Monday, down a whopping 6.5 yen from the day's high of 125.36 yen. It last traded at 120.71 yen.
The dollar also tumbled to as low as 90.85 yen, its lowest in nearly a month, from a 33-month high of 94.77 yen hit earlier in the day on the news that Japan plans to nominate an advocate of aggressive monetary easing, Asian Development Bank President Haruhiko Kuroda, as the next central bank governor.
Analysts say steep losses in the yen in recent months on bets of further monetary easing in Japan have made it vulnerable to sharp reversals.
Japanese Prime Minister Shinzo Abe's repeated calls for more forceful central bank action had been largely behind the yen's constant decline since November.
"The yen was long overdue for a correction and all it needed was a catalyst. The yen's downtrend may have run its course for the time being," said Teppei Ino, currency strategist at the Bank of Tokyo-Mitsubishi UFJ.
The dollar last traded at 92.55 yen, up about 0.7 percent from late U.S. trade in a volatile trade on expectations of buying from Japanese importers,
While expectations of more BOJ easing could cap the yen, the Japanese currency could gain, at the expense of risk currencies, if risk appetite abates further.
Italian bonds and shares were set to fall on Tuesday as a messy election result fuelled fears of a hung parliament and an ineffectual government.
In the United States, President Barack Obama and Congress remain deadlocked over how to prevent $85 billion in automatic government spending cuts set to start on March 1.
An immediate focus is on U.S. Federal Reserve chief Ben Bernanke's congressional testimony at 1500 GMT, with some investors rattled by debate within the Fed about how long it should keep buying bonds to support the economy.
Sterling held a bit above its 31-month low against the dollar hit on Monday though it is seen as vulnerable on expectations the Bank of England could expand its quantitative easing further to bolster the fragile UK economy.
The pound traded flat at $1.5165, but not far from Monday's low of $1.5073. Bank of England Governor Mervyn King will speak in Tokyo at 0600 GMT.