* 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
* 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 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
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
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
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.