March 5, 2018 / 1:50 AM / 17 days ago

FOREX-Euro holds breath on Italy, draws support from German deal

* Italian polls show hung parliament, rise of anti-euro parties

* Euro draws support from German coalition deal

* Dollar hampered by concerns over trade war

By Hideyuki Sano

TOKYO, March 5 (Reuters) - The euro clawed back earlier losses on Monday but remained prone to volatility as early counts in Italian elections pointed to stronger-than-expected results for euro-sceptic parties, with no major party blocs winning an outright majority.

The common currency found some support as Germany’s Social Democrats (SPD) decisively backed another coalition with Chancellor Angela Merkel’s conservatives.

The euro traded at $1.2333, slightly above its late U.S. levels, off its seven-week low of $1.21545, which it touched on Thursday.

Exit polls and early counts showed Italy’s 5-Star Movement is likely to be the largest single party by a wide margin, a projection a prominent deputy from the party called a “triumph”.

The centre-right bloc, made up of former prime minister Silvio Berlusconi’s Forza Italia, and the far-right League and Brothers of Italy, is set to win most seats but is seen falling some way short of an absolute majority.

With full results not expected for a few hours or more, market reaction has been limited so far but investors are likely to take fright at any suggestion the 5-Star could form a coalition with the right-wing League.

Exit polls suggested the two forces would have enough seats to govern together and they have in the past shared strong anti-euro views. While the League still says it wants to leave the single currency at the earliest feasible moment, the 5-Star says the time for quitting the euro has passed.

“On the whole, the results appeared to be in line with prior polls. The focus now is whether the League will become the biggest party in the centre-right bloc. In that case, there’s a chance the bloc could fall apart,” said Hideki Kishida, senior analyst at Nomura Securities.

The euro started the week on a solid footing as two-thirds of SPD members supported the coalition, clearing the way for a new government in Europe’s largest economy after months of political uncertainty.

The U.S. currency was also on slippery footing after President Donald Trump last week proposed tariffs on imported steel and aluminium, raising fears of retaliation from its trade partners that could trigger a trade war.

“I would think the market will soon digest European politics and shift focus back to the trade issues, in which case the dollar is likely to come under pressure,” said Yukio Ishizuki, senior strategist at Daiwa Securities.

The dollar was softer against the yen at 105.43 yen, near Friday’s 16-month low of 105.24.

Bank of Japan Governor Haruhiko Kuroda said the BOJ would consider an exit from its ultra-easy monetary policy if it met its inflation target in the next fiscal year from April 2019.

Traders will be looking at confirmation hearing in the parliament by two nominees for BOJ Deputy Governors, Masazumi Wakatabe and Masayoshi Amamiya. (Editing by Kim Coghill and Sam Holmes)

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