May 30, 2018 / 2:19 AM / 3 months ago

FOREX-Euro buried near multi-month low as Italian political crisis deepens

* Euro at 10-month low vs dollar, down 4.5 pct this month

* Spikes in Italian debt yield point to fear of Italy's euro exit

* Renewed tension in Sino-U.S. trade tension another drag on mood

By Hideyuki Sano

TOKYO, May 30 (Reuters) - The euro was buried near multi-month lows against major rivals on Wednesday as Italy's political crisis deepened, raising the likelihood of an early election that some market players fear could lead to a eurosceptic government in Rome.

Sources close to some of Italy's main parties said there was now a chance that President Sergio Mattarella could dissolve parliament in the coming days and send Italians back to the polls as early as July 29.

The euro, which slipped to a 10-month low of $1.1510, on Tuesday, and last stood at $1.1542, little moved in Asian trade. It has fallen 4.5 percent so far this month.

The 10-year Italian government bond yield jumped to 3.19 percent as bond prices fell, versus just under 2 percent around two weeks ago.

The two-year debt yield jumped to 2.71 percent overnight from 0.84 percent the day before.

"The way Italy's short-term debt yields are spiking makes you think default risk is on radar in the market. It tells how grave the situation is," said Makoto Noji, senior strategist at SMBC Nikko Securities.

"What the markets are starting to factor-in is not a default per se but an early election leading to a victory of eurosceptics and an exit from the euro," he said.

The euro dropped 1.0 percent against the safe-haven Swiss franc on Tuesday, its biggest daily fall since September, and last stood at 1.1445 francs.

For the month, it was down 4.4 percent, the biggest decline since January 2015, when the Swiss central bank suddenly scrapped its floor for the euro against the Swiss currency.

Against the yen, the euro stood at 125.31 yen after hitting an 11-month low of 124.62 yen overnight, from around 131 yen just over a week ago.

"'Don't try to catch a falling knife' is the phrase I heard very often today," said Bart Wakabayashi, Tokyo Branch manager of State Street Bank.

"For the time being, we will just have to see how things will develop."

The dollar slipped 0.3 percent to 108.38 yen, edging towards a five-week low of 108.115 yen hit the previous day as the risk-averse mood boosted the yen.

Investors are also wary of an escalation in trade frictions between the United States and China after the White House said that it still holds the threat of imposing tariffs on $50 billion of imports from China.

Washington said it will use it unless Beijing addresses the issue of theft of American intellectual property.

U.S. bond yields have plunged over the past couple of days, undermining the dollar's yield attraction. U.S. short-term interest rate futures are now pricing in only about 70 percent chance the Fed will raise rates two more times this year.

Political risk in Europe is dragging down the British pound, which hit a six-month low of $1.3205 the previous day and last traded at $1.3259.

The dollar's index against a basket of six major currencies stood at 94.829, near the technical double-top around 95.15 touched in October and November last year. (Reporting by Hideyuki Sano Editing by Eric Meijer and Sam Holmes)

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