* Euro up slightly after German SPD backs coalition deal
* Italian exit polls point to hung parliament
* Markets could be rattled by possibility of M5S-League govt
* Dollar hampered by concerns over trade war
By Hideyuki Sano
TOKYO, March 5 (Reuters) - The euro gave up early gains and dipped in early Monday trade as exit polls in Italian elections pointed to a stronger-than-expected showing for the anti-establishment 5-Star Movement, although it is falling short of an absolute majority.
The common currency had firmed earlier after Germany’s Social Democrats (SPD) decisively backed another coalition with Chancellor Angela Merkel’s conservatives and as initial exit polls in Italy pointed to a hung parliament as expected.
The euro dipped to $1.2309, down 0.1 percent after having risen to as high as $1.23655, extending its recovery from seven-week low of $1.21545 touched on Thursday.
The 5-Star Movement is likely to be the largest single party by a wide margin, a projection a prominent deputy from the bloc called a “triumph”.
The centre-right bloc, made up of former prime minister Silvio Berlusconi’s Forza Italia, and the far-right League and Brothers of Italy, is set to win most seats but is seen falling some way short of an absolute majority.
With full results not expected for several hours, market reaction has been limited so far but investors are likely to take fright at any suggestion the 5-Star could form a coalition with the right-wing League.
Exit polls suggested the two forces would have enough seats to govern together and they have in the past shared strong anti-euro views. While the League still says it wants to leave the single currency at the earliest feasible moment, the 5-Star says the time for quitting the euro has passed.
The euro started the week on a solid footing as two-thirds of SPD members supported the coalition, clearing the way for a new government in Europe’s largest economy after months of political uncertainty.
The U.S. currency was also on slippery footing after President Donald Trump last week proposed tariffs on imported steel and aluminium, raising fears of retaliation from its trade partners that could trigger a trade war.
“I would think the market will soon digest European politics and shift focus back to the trade issues, in which case the dollar is likely to come under pressure,” said Yukio Ishizuki, senior strategist at Daiwa Securities.
The dollar was also easier against the yen at 105.55 yen , near Friday’s 16-month low of 105.24.
Bank of Japan Governor Haruhiko Kuroda said the BOJ would consider an exit from its ultra-easy monetary policy if it met its inflation target in the next fiscal year from April 2019.
Traders will be looking at confirmation hearing in the parliament by two nominees for BOJ Deputy Governors, Masazumi Wakatabe and Masayoshi Amamiya. (Editing by Kim Coghill)