* Italy election results raise fear of political paralysis
* A break of $1.3032 could open way for test of Jan 4 low
* Yen up on a long overdue correction - analyst
* Pound holds above 31-month low hit in previous session
By Hideyuki Sano
TOKYO, Feb 26 The euro skidded close to a
seven-week low against the dollar while the yen kept some
distance from multi-month lows on Tuesday as the spectre of
political gridlock in Italy spurred traders to seek refuge in
the U.S. and Japanese currencies.
Italy's centre left 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 fears about euro zone debt. That could
reverse the optimism that the worst of the region's crisis was
over, which had benefited the euro and riskier assets in general
earlier this year.
The euro traded at $1.3052, after falling as low as
$1.3039, its lowest since Jan. 10.
Support lies at $1.3032 from the bottom of the daily
Ichimoku charts. A break there would send 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 that day's high of 125.36 yen. It
last traded at 119.65 yen, down 0.3 percent.
The dollar last traded at 91.68 yen, down about 0.2
percent from late U.S. levels. The dollar index, which
tracks the greenback against a basket of other major currencies
rose 0.2 percent to 81.832.
In Monday's whipsaw trading, the dollar 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
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 was the main force behind the yen's
nearly 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.
While expectations of more BOJ easing could pressure the
yen, the Japanese currency could gain at the expense of riskier
currencies if risk appetite abates further.
In addition to the Italian gridlock, a U.S. stalemate over
spending cuts that threaten the economic recovery undermined
market sentiment. President Barack Obama and Congress remain
deadlocked over how to prevent $85 billion in automatic
government spending cuts set to start on March 1.
Investors' immediate focus will be on U.S. Federal Reserve
chief Ben Bernanke's congressional testimony at 1500 GMT, with
some 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 bought $1.5173 , up about 0.2 percent and
holding above Monday's low of $1.5073.