By Richard Hubbard
LONDON (Reuters) - The yen hit a 33-month low against the dollar on Monday as the likelihood of sharply easier monetary policy in Japan grew, while Italian stocks and bonds gained in anticipation of the results of national elections.
Japan's currency's resumed its recent slide after reports emerged that the government would nominate Haruhiko Kuroda, a vocal advocate of aggressive monetary expansion, to be the next governor at the Bank of Japan.
A source familiar with the process told Reuters that an academic critical of central bank efforts to fight deflation would also be named as one of two new deputy governors.
"Both those candidates are in favor of more aggressive BOJ easing, and that is weighing upon the yen," said Lee Hardman, currency economist at Bank of Tokyo Mitsubishi.
The yen hit a low of 94.77 against the dollar, a level not seen since May 2010 before recovering to around 94 yen. The euro jumped to a high of 125.36 yen and then settled at around 124.37, well below a 34-month peak of 127.71 set early this month.
The yen had already fallen around 20 percent against the dollar over the past three months or so on expectations Japan would take more aggressive measures to defeat its persistent deflation and boost its recession-hit economy.
GLOBAL EASING PROSPECT
The likelihood of more aggressive easing by Japan comes after two top U.S. Federal Reserve officials on Friday argued in favor of ultra-loose policies in an effort to counter concerns of an early end to its massive asset-buying program.
Markets are on edge about the Fed's plans ahead of testimony by Chairman Ben Bernanke to Congress on Tuesday and Wednesday, which is likely to centre on how long the $85 billion in monthly asset purchases will last.
Meanwhile, at a time when Bank of England policymakers are reported to be more open to further easing, Britain's government was coming under pressure to loosen its tough fiscal stance after losing its prized triple-A credit rating.
Minutes from the Bank of England's policy meeting last week showed a surprise rise in support for more quantitative easing, which has prompted analysts to pencil in a restart of a bond-buying program it last used in October.
The ratings downgrade by Moody's, which came late on Friday, sent sterling to a 31-month low against the dollar of $1.5073 and a 16-month low against the euro of 87.75 pence. TThe UK's main share index (.FTSE) shrugged off the news to gain 0.4 percent.
British government June bond futures touched a low of 115.50, some 56 ticks down from Friday's close as the market reacted to the ratings loss, but the prospect of future policy easing helped the market recover.
"Now that the UK's triple-A rating has been lost, it probably makes sense for the Chancellor to ease the pace of fiscal consolidation in tandem with expansionary monetary policy that is likely under incoming Bank of England Governor Mark Carney," said Tristan Cooper, sovereign debt analyst at Fidelity Worldwide Investment.
The growing indications of further monetary policy stimulus by major central banks lifted Asian and European equity markets, while U.S. stock index futures pointed to a mixed open on Wall Street, where shares rose strongly on Friday. (.N)
Tokyo stocks hit a 53-month high (.N225) on the news of Kuroda's likely appointment, though gains in other Asian markets were limited by data showing growth in China's giant factory sector edged back from two-year highs in February.
HSBC's flash purchasing managers' index (PMI) of Chinese manufacturers slipped to a four-month low of 50.4 from January's final reading of 52.3, which had been the best performance since January 2011.
The flash PMI, however, did indicate a fourth consecutive month of expansion, even though it only just cleared the 50-mark separating expansion from contraction.
In Europe attention was on the outcome of the unpredictable Italian elections, which hold the key to the whether the country's current reform program will continue uninterrupted.
Voting ends at 1400 GMT, and exit polls, expected shortly afterwards, will be closely scrutinized for any signs of whether anger at current austerity measures have produced an unworkable government.
Italian bond prices rose in thin early trading, sending 10-year bond yields down 6 basis points to 4.39 percent, while the cost of insuring against an Italian default fell as a low turnout encouraged hopes of a clear victory by pro-reform parties.
The Italian blue-chip share index (.FTMIB) gained 0.3 percent.
"If we don't have an indication of a clear winner, there will be pressure on Italian bond yields," said Ishaq Siddiqi, market strategist with trading house ETX Capital.
European shares extended their slow recovery from multi-month lows in early trade as investors kept a close eye on Italy, with the FTSEurofirst 300 (.FTEU3) up 0.1 percent at 1,166.88 points.
Oil prices were supported by the rise in stock markets, but worries that the slide in China's manufacturing activity would dent demand from the world's top energy consumer capped gains.
Brent crude gained 42 cents to $114.52 a barrel having hit a low of $113.73 when the Chinese data emerged. U.S. oil rose 30 cents to $93.43 after an earlier low of $92.96, near Friday's more than one-month trough of $92.44.
Investors in the gold market preferred to ignore the Chinese data and snap up the precious metal after last week's drop to a seven-month low, though the market was cautious ahead of the outcome of the Italian elections. Spot gold rose $5.04 an ounce to $1,585.34.
(Additional reporting by Anooja Debnath and William James. Editing by Will Waterman)