* Euro drops after Euro zone PMI surveys
* Investors also wary ahead of Italian election
* Dollar index at three-month high after Fed minutes
By Anirban Nag
LONDON, Feb 21 (Reuters) - The euro hit a six-week low against the dollar and fell more than 1 percent against the yen on Thursday, hurt by fresh evidence the euro zone economy is struggling.
Expectations the U.S. Federal Reserve may stop providing monetary stimulus also helped the dollar gain broadly, while uncertainty ahead of an Italian general election on the weekend also made investors wary of buying the single currency.
The euro dropped around 0.8 percent to $1.31675, its lowest level since Jan. 10, and well below a 15-month peak of $1.3711 reached on Feb. 1.
It has now broken below support at $1.3310, the 38.2 percent retracement of its November-February rally, and its 55-day moving average at $1.3285. The losses leave it open for a test of the Jan. 10 low of around $1.3040.
Against the yen, the euro fell more than 1.5 percent on the day to 122.25 yen, its lowest level since the end of January.
“The FOMC (Federal Open Market Committee) minutes were the biggest factor and the disappointing PMIs are giving people a reason to be shorting the euro,” said Michael Sneyd, currency strategist at BNP Paribas.
“The Italian elections are just making investors a little bit cautious of putting on big positions ahead of the result.”
A hung parliament in Italy could trigger a sell-off in the peripheral bond market which in turn would weigh on the euro
Despite the euro’s broad weakness, BNP Paribas said the reaction to the FOMC minutes was overdone and recommended buying the single currency against the dollar, with a target of $1.38.
The euro extended losses on Thursday after PMI activity data for February pointed to continued weakness in the euro zone, keeping alive chances of an interest rate cut by the European Central Bank in coming months.
The single currency was already under pressure against the dollar after minutes from the Federal Reserve’s January policy-setting meeting, released on Wednesday, showed “a number of participants” expressed concern over the risks of continued asset purchases.
“The French and the German PMI surveys have both knocked the euro lower,” said Peter Kinsella, currency strategist at Commerzbank. “Combined with the Fed minutes that showed more dissension to further monetary stimulus in the U.S. and the grim economic reality in the euro zone, we could see a weaker euro.”
The Fed minutes fuelled speculation among market players the Fed is moving closer to tightening policy, helping push the dollar index to a five-month high of 81.508.
The index had posted its biggest one-day gain in seven months on Wednesday.
Broad demand for the dollar helped push the U.S. currency to a one-month high against the Swiss franc of 0.93310 francs , and a four-month peak against the Australian dollar of US$1.0225.
As the Fed considers the eventual end of its asset buying, the dollar stands to gain against currencies like the yen and the British pound. Both the Bank of Japan and the Bank of England are considering printing more money and expanding their balance sheets, driving down the value of their currencies.
The dollar has gained more than 7 percent against the yen while sterling lost 6 percent so far this year.
The yen has been the worst performing major currency so far this year as investors bet on more aggressive policies from the Bank of Japan to reflate the world’s third-biggest economy.
On Thursday, the dollar took a breather from its recent rally and was trading down 0.5 percent at 93.04 yen.
Morgan Stanley strategists said the dollar’s decline was likely to be limited around the 92.90 yen area, the low struck on Feb. 12, and the greenback would eventually rise to test its recent near three-year highs of around 94.50 yen.