* Single currency reverses gains after German SPD vote
* Positioning in long euro bets still near record
* Graphic: World FX rates in 2018 tmsnrt.rs/2egbfVh
By Saikat Chatterjee
LONDON, March 5 (Reuters) - The euro held near the day’s lows on Monday, reversing some early gains as an inconclusive election in Italy pointed to prolonged political uncertainty after a stronger-than-expected showing by euro-sceptic parties.
The euro had risen to a two-week high above $1.2360 in Asian trading after Germany’s Social Democrats voted to enter a grand coalition with Chancellor Merkel’s conservatives, signalling an end to a period of political uncertainty in Europe’s biggest economy.
But it quickly plunged 0.8 percent towards the day’s lows at $1.2269 as results from Italy pointed to a far messier than expected outcome, with a strong showing for anti-establishment parties and no groupings looking strong enough to form a stable government.
“There is some lingering caution around the outcome of the Italian election results and only the German vote prevented a bigger drop in euro/dollar,” said Viraj Patel, an FX strategist at ING in London.
The euro fell 0.3 percent to $1.2269, edging towards the seven-week low of $1.21545 it touched on Thursday. Against the yen it fell 0.7 percent to 129.35 yen, its lowest since late August.
The euro zone’s third biggest economy faces a prolonged period of political instability.
“We have seen the ascent of parties that create some concern in terms of reforms, their views on the euro and their views on forming alliances and so this does not favour stability,” said Maria Paola Toschi, a global market strategist at JP Morgan Asset Management in London.
But risk reversals in the currency derivatives markets for euro/dollar showed markets had been far more cautious before the French election verdict.
Even latest positioning data showed euro bulls remained firmly upbeat, with net long currency positions still near touching distance of record bullish bets in early February.
“Ultimately this is expected uncertainty and the markets are far more tolerant about European politics than earlier given the favorable economic backdrop,” said Geoffrey Yu, head of the U.K. investment office at UBS Wealth Management in London.
The dollar was also on slippery footing after U.S. President Donald Trump last week proposed tariffs on imported steel and aluminium, raising fears of retaliation that could trigger a trade war.
The dollar was softer against the yen at 105.49 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.
Reporting by Saikat Chatterjee; Additional reporting by Hideyuki Sano and Tomo Uetake in TOKYO and Dhara Ranasinghe; editing by John Stonestreet