* Dollar index near fresh 5-month high brushed overnight
* GBP up after report UK ready to stay in EU’s customs union
* Aussie, loonie, kiwi supported by ebb in risk aversion (Adds details and quotes, updates prices)
By Shinichi Saoshiro
TOKYO, May 17 (Reuters) - The dollar firmed on Thursday after the euro retreated to a five-month low on concerns political developments in Italy could cause wider disruptions in the euro bloc, while rising U.S. Treasury yields knocked emerging market currencies lower.
The euro was last at $1.1827, up 0.15 percent on the day, after sliding overnight to $1.1763, its lowest since Dec. 18. The common currency has shed nearly 1 percent this week.
Political uncertainty in Italy, where populist parties have jostled to forge a common platform in a bid to lead the next government, have been a major drag on the euro.
The euro slid to the five-month low on reports Italy’s anti-establishment 5-Star Movement and anti-immigrant League may ask the European Central Bank to forgive 250 billion euros of debt as the parties worked to draft a coalition programme.
“The euro looks on track for further losses as market participants still appear to have more long positions on the euro to liquidate,” said Yukio Ishizuki, senior currency strategist at Daiwa Securities in Tokyo.
“While the situation in Italy is a concern for currencies, the 5-Star Movement sees Britain struggle with its EU exit plan and is unlikely to pursue a similar agenda. The political fallout from Italy could be relatively well contained as a result.”
For now the euro also faced pressure from a bullish dollar, which has been boosted this week as U.S. benchmark yields broke above the 3 percent threshold to a seven-year high.
The dollar index against a basket of six major currencies dipped 0.2 percent to 93.180 but was in close reach of 93.632, its highest since Dec. 19 marked on Wednesday.
The pound rose 0.5 percent to $1.3558 after the Telegraph reported that Britain will tell Brussels it is prepared to stay in the European Union’s customs union beyond 2021.
The dollar was 0.15 percent lower at 110.270 yen. A rise above 110.450 would take the greenback to its highest since Feb. 2 versus its Japanese peer.
The Australian dollar added 0.3 percent to $0.7540 after gaining 0.6 percent overnight, buoyed by a rise in prices of commodities such as copper.
Other commodity-linked currencies like the Canadian dollar also advanced as equities bounced back overnight from the previous day’s losses caused by the spike in U.S. yields.
The loonie rose 0.2 percent to C$1.2761 per dollar, extending its overnight rally. The commodity-linked currency is sensitive to movements in equity markets, which are seen as a key indicator of the prospects for global growth.
The New Zealand dollar gained 0.3 percent to $0.6919 after managing to pull back the previous day from a five-month trough of $0.6851. Volatile emerging market currencies did not fare as well. Rising Treasury yields have enhanced the dollar’s appeal and also raised global borrowing costs - a blow for some currencies experiencing slower economic growth at home and in some cases political strife.
The Turkish lira and Argentina’s peso have been at the heart of the storm. The lira has marked a succession of record lows against the dollar this month while the peso has lost a quarter of its value versus the greenback since the start of the year.
“In addition to the Argentine peso and the Turkish lira, falls by the Brazilian real and the Indonesia rupiah are also accelerating. Emerging markets with current account deficits face the risk of fund outflows and their currencies declining further,” said Makoto Noji, senior strategist at SMBC Nikko Securities in Tokyo.
Brazil’s real dropped to a two-year low against the dollar overnight while the Indonesia rupiah retreated to its weakest since October 2015 on Wednesday. (Editing by Sam Holmes)