* USD strong across the board, USD/JPY at 2-week high
* Euro softer, may extend losses amid Greek uncertainty
* Aussie at 5-mth low after breaching important support
By Antoni Slodkowski
TOKYO, May 16 (Reuters) - The euro hovered at four-month lows against the dollar on Wednesday and was likely to extend hefty losses sustained so far this month after Greece said it would hold new elections, increasing the risk Athens could exit the euro.
The prospect of prolonged political instability in the debt-ridden country, compounded by skittish bond markets is likely to keep the European currency under severe pressure, analysts said.
The common currency slid 0.1 percent to $1.27223, struggling to hold above a four-month low of $1.27215 hit the day before, according to EBS data. It has lost around 4 percent in May.
“The market is very short euro, the currency seems oversold by any technical measure, and yet it keeps extending losses - this means that we may quickly approach the $1.25-$1.26 area,” said Koji Fukaya, director of global foreign exchange research for Credit Suisse Securities in Tokyo.
“The Greek problems are obviously the main driver here, but even looking at economic fundamentals, the euro around $1.30 just seemed unnaturally expensive. I see this move as a return into more neutral territory.”
A Greek departure from the euro zone would have a potentially huge knock-on effect on struggling economies such as Italy and Spain, whose bond yields climbed above the crucial 6 percent mark the day before.
“An exit from the euro zone would bear large direct costs for both Greece and the other euro zone member states,” said Frederik Ducrozet, economist at Credit Agricole.
“Indirect costs could end up even higher as the euro zone no longer looks as ‘irreversible’, and struggling peripheral countries are facing a renewed confidence crisis.”
The single currency also looked feeble on charts, having decisively fallen through an important support line at $1.2827, the 76.4 percent retracement of its rally earlier this year from $1.2624 to $1.3486.
A clear break of the level opened the way for a test of the January low of $1.2624, though traders were wary of bouts of short-covering which could send the euro temporarily higher as net shorts in the currency stand at three-month highs.
With the appetite for risk dampened, investors kept piling into assets deemed as safe, pushing the dollar index - a gauge of its performance against major currencies - to a four-month high of 81.34.
This helped the greenback perform well against the yen, driving it to a two-week high of 80.45, roughly one yen above the 2-1/2 month nadir of 79.428 yen hit last week.
The dollar’s outlook turned positive after it closed above resistance at its Ichimoku cloud base at 80.11 the previous day, traders said. The kijun line near 80.60 is the next resistance level.
Traders added the pair may extend its rise, citing stop-loss bids around 80.45-50. They added, however, that Japanese exporters may cap any further advances with offers lined up their around 81 yen.
Worries about slowing Chinese and global growth also weighed on higher-yielding currencies such as the Australian dollar, which hit a five-month low of $0.9917 as speculators targeted stop losses below its low in the previous session of 0.9921.
It was last down 0.1 percent on the day at 0.9926, but analysts said it charts suggested further losses after it had breached a major support at $0.9945-50, the 61.8 pct retracement of its climb from October to February.