NEW YORK The euro fell to a more than six-week low against the dollar in volatile trade on Monday on worries about political gridlock in Italy that could threaten the country's economic reforms and re-ignite the euro zone debt crisis.
Conflicting early forecasts of the result of Italy's election on Monday raised the spectre of deadlock in parliament. The election's outcome holds the key to whether the current reform program will continue uninterrupted in the euro zone's third-largest economy.
"It's just a continuation of renewed political risk in Italy," said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington.
None of the four main groups running in the Italian parliamentary election is likely to win a majority in the Senate, a projection for RAI state TV indicated on Monday.
Italy's centre-left coalition holds a slim lead over former Prime Minister Silvio Berlusconi's centre-right bloc in the election for the lower house of parliament, three TV projections indicated on Monday.
The euro fell as low as $1.3077 on Reuters data, the lowest since January 10. It was last down 0.6 percent at $1.3096.
Against the yen, the euro fell as low as 120.88 yen, the weakest since January 25. It was last at 121.68, down 1.2 percent.
The euro had earlier been sharply higher as a successful Italian bond sale and hopes of a centre left government buoyed the currency, but that dissipated when the exit polls emerged.
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 fell 0.6 percent at 92.81 yen, after earlier hitting its highest level in more than 33 months of 94.76 yen, according to Reuters data.
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 kickstart the world's number three economy," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington D.C.
"Consequently, the yen remains vulnerable to continued losses across the board," he said.
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.
(Additional reporting by Julie Haviv; Editing by Nick Zieminski)