February 25, 2013 / 10:16 PM / 5 years ago

FOREX-Euro slumps on Italy fears; yen surges broadly

* Fears grow about political gridlock in Italy

* Euro hits six-week low versus dollar

* Yen soars after falling to more than 33-month low

By Wanfeng Zhou

NEW YORK, Feb 25 (Reuters) - The euro fell to a more than six-week low against the dollar on Monday, while the yen soared broadly as worries about political gridlock in Italy spurred investors to seek refuge in the U.S. and Japanese currencies.

With more than two-thirds of the vote counted, the projections suggested the centre left could have a slim lead in the race for the lower house of parliament. But no party or likely coalition appeared to 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. Optimism the worst of the region’s crisis was over benefited the euro earlier this year.

The yen, at one point, soared more than 3 percent against the euro and 2 percent against the dollar. Steep losses in the yen in recent months on bets of further monetary easing in Japan have made it vulnerable to sharp reversals.

“Considering the substantial short yen positioning, I don’t think it’s completely surprising to see the move,” said Vassili Serebriakov, currency strategist at BNP Paribas in New York. “If you look at what’s been moving, the largest move is really euro/yen.”

The euro fell as low as $1.3047 on Reuters data, the lowest since Jan. 10. It was last down 0.8 percent at $1.3075.

Against the yen, the euro hit 118.86 yen, the weakest since Jan. 24. It was last at 120.03, down 2.5 percent.

The deputy head of Italy’s center-left Democratic Party (PD) dismissed talk of new elections on Monday and said his coalition should win a lower house majority and would have the responsibility of trying to form a government, despite deadlock in the Senate.

“We’re seeing a general pullback in risk,” said Michael Woolfolk, senior currency strategist at BNY Mellon in New York.

Besides Italy’s elections, he said Fed Chairman Ben Bernanke’s speech and a flurry of economic data from the major countries this week also contributed to a more cautious attitude by investors.

The euro could continue to lose ground if risk appetite abates. U.S. President Barack Obama and Congress remain deadlocked over how to prevent $85 billion in automatic government spending cuts set to start taking effect on March 1.

The dollar lost 1.7 percent to 91.75 yen, reversing earlier gains that drove it to a more than 33-month high of 94.76 yen, according to Reuters data.

The yen weakened after news that Japan’s prime minister is likely to nominate an advocate of aggressive monetary easing, Asian Development Bank President Haruhiko Kuroda, as the next central bank governor to step up his fight to finally rid the country of deflation.

Abe’s repeated calls for more forceful central bank action are largely behind the yen’s nearly 20 percent loss in value against the dollar since November.

“The news all but ensures that the BoJ will continue on an expansionary path of monetary easing to help kick-start the world’s number three economy,” said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington D.C.

Despite Monday’s gains, some analysts said the yen would remain on a weakening trend, although the dollar would face resistance at the psychologically important level of 95 yen.

BNY Mellon’s Woolfolk said the yen tends to get a boost between late February and mid March as Japanese investors repatriate cash ahead of Japan’s fiscal year end in March.

Sterling edged up 0.2 percent to $1.5161, hitting its lowest level since July 2010 after the UK lost its prized triple-A credit rating on Friday.

Moody’s cut Britain’s rating by one notch to Aa1 from Aaa, citing weak prospects for economic growth.

The pound also looked vulnerable on expectations the Bank of England could expand its quantitative easing further to bolster the fragile UK economy.

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