FOREX-Euro sluggish as Italy uncertainty, ECB rate outlook weigh
* Euro near Friday's 2-1/2-month low of $1.2965
* Prospect of fresh Italian elections grows
* Growing bets on ECB rate cut this week
NEW YORK, March 4 (Reuters) - The euro traded near a 2-1/2-month low against the dollar and fell against the yen on Monday, weighed down by political uncertainty in Italy and expectations the European Central Bank will cut interest rates sooner than previously thought.
Italy appeared to be inching toward another round of elections after an inconclusive one last week. Analysts are concerned that without a stable government, the country will be unable to pass reforms required to get its borrowing and debt under control.
Italian 10-year bond yields as a result rose to 4.881 percent on Monday, underperforming all euro zone bonds apart from Greece's.
"The euro continues to be firmly out of favor, as has been the case since the outcome of the Italian parliamentary election last month," said Samarjit Shankar, director of market strategy at BNY Mellon on Boston.
"That rekindled yet another bout of investor concerns due to the political uncertainty in the country in particular and the commitment of euro zone policy makers to austerity in general."
Renewed worries about Italy, the euro zone's third-largest economy, rattled investors, sending sentiment in the currency bloc down sharply in March and fuelling speculation the ECB will lower interest rates in the near term.
Although a Reuters poll last week showed economists expected the ECB to keep rates on hold this Thursday, some strategists expect the bank to revise down its inflation projection and look for a 25-basis-point rate cut as early as the April meeting.
The euro hit a session low of $1.2980, not far from a 2-1/2-month low of $1.2965 struck on Friday, after the euro zone sentiment data was released. The euro zone common currency was last down little changed on the day at $1.3018.
Stop-loss orders are cited below $1.2960, with reported option barriers at $1.2950, $1.2925, and $1.2900. A break below $1.2900 could take the euro toward its next support at $1.2842, its 200-day moving average at current prices.
The euro was also 0.2 percent lower against the yen at 121.60 yen.
The economic outlook for the euro was glum and some analysts said poor euro zone services Purchasing Managers Index surveys on Tuesday and growth data on Wednesday could push the euro even lower if they fell below forecasts.
"There's growing speculation that the European Central Bank will show a greater willingness to push the benchmark interest rate to a fresh record low," said David Song, currency analyst at DailyFX in New York.
"The fundamental developments coming out of the euro area may continue to drag on the exchange rate should it highlight a weakening outlook for growth and inflation," Song added.
Some US$4.13 billion in euros changed hands using Reuters Dealing.
Investors discarded growth-linked currencies such as the Australian dollar after China announced measures to tighten curbs on the property market.
The Australian dollar fell to a near eight-month low of US$1.0113 and was last down 0.1 percent on the day at US$1.0190.
The dollar was down 0.2 percent against the yen at 93.40 yen with the session low at 93.15.
Joseph Trevisani, chief market strategist at WorldWide Markets in Woodcliff Lake, New Jersey, said losses accelerated after going through stop-loss orders at 93.40, with support likely at 93.15 and 93.
Other central bank meetings and announcements this week include the Reserve Bank of Australia, the Bank of Japan, the Bank of Canada and the Bank of England.
"These central banks are likely to sound more dovish at the meetings, which should de facto support the dollar," said Sean Cotton, vice president and foreign exchange advisor at Bank of the West in San Ramon, California.
Meanwhile, the U.S. data calendar highlight this week will be the nonfarm payrolls report for February on Friday.