May 29, 2018 / 2:44 PM / 5 months ago

FOREX-Dollar at 10-month high against euro as 'Quitaly' fears rise

* Political crisis in Italy fuels bond market sell-off

* Euro on track for biggest monthly drop in more than 3 years

* Graphic: World FX rates in 2018 tmsnrt.rs/2egbfVh (Updates analyst quotes, exchange rates, dollar news)

By Kate Duguid

NEW YORK, May 29 (Reuters) - The dollar rose on Tuesday to a 10-month high against the euro after a sell-off in Italy's debt market drove investors to dump the single currency.

A deepening political crisis in Italy, the euro zone's third-biggest economy, provoked selling of Italian assets and the euro that was reminiscent of the euro zone debt crisis of 2010-2012.

Italy's president has set the country on a path to fresh elections by appointing a former International Monetary Fund official as interim prime minister, with the task of planning for snap polls and passing the next budget.

Some investors believe the election will deliver an even stronger mandate for anti-establishment, euroskeptic politicians, casting doubt on Italy's future in the euro zone.

"The underlying problem here... is a fundamental question about the euro zone, a political experiment lacking a fiscal union which can fail if fair growth and wealth are not achieved," said Commerzbank analyst Ulrich Leuchtmann.

Many are wary the Italian government would reach the broad-based support in all chambers of government needed to get to the point of constitutional change.

"We are still very skeptical of 'Quitaly,'" said Mark McCormick, North American head of FX strategy at TD Securities in Toronto.

"But markets are looking for a momentum trade – it’s selling European rates, it’s selling European equities and it’s selling the euro. I don’t see anything that is going to arrest that anytime soon," he added.

The single currency on Tuesday slipped below $1.16 for the first time since November 2017 to hit a 10-month low of $1.1506 and weakened significantly against the safe-haven Swiss franc and Japanese yen. The euro is set for its biggest monthly drop in more than three years, according to Thomson Reuters data.

The dollar strengthened across most of the foreign exchange market, not just against the euro, in a flight-to-safety move. But the risk-off trade also benefited the yen, with the dollar dropping about 0.6 percent on Tuesday to a five-week low of 108.41 against the Japanese currency.

The dollar index, which measures the greenback against a basket of six major currencies, was up half a percent on the day at 95.025, hitting a 6-1/2 month high.

Reporting by Kate Duguid, Saikat Chatterjee and Tom Finn; Editing by Dan Grebler

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