* Euro slips, may retreat more from 4-1/2 mth peak
* Portugal politics weigh on euro
* EU set to delay decision on euro zone bailout fund
* Yen trapped by wariness over intervention
By Masayuki Kitano and Naomi Tajitsu
SINGAPORE/HONG KONG, March 24 (Reuters) - The euro slipped
on Thursday, pulling further away from a 4-1/2 month high versus
the dollar on heightened worries that political instability in
Portugal may force it to become the latest country in the region
to seek a European Union bailout.
The single currency slipped to the day's low of $1.4071 as
concerns about weakness in debt-heavy euro zone economies were
highlighted by a media report that ratings agency Moody's would
downgrade the credit ratings of Spanish banks on Thursday.
Market participants said the euro could slide further to
$1.40 in the near term. Traders said light stop-loss orders were
creeping below that level on Thursday.
Portuguese Prime Minister Jose Socrates resigned on
Wednesday after parliament rejected his government's latest
austerity measures aimed at avoiding a bailout.
"If -- and this is a big if -- there is a bailout for
Portugal, the question would be how it would be negotiated with
a government in essentially a caretaker mode," said David
Forrester, currency strategist at Barclays Capital in Singapore.
Many in the market anticipate Lisbon could appeal for a debt
bailout in the near future as the government struggles to
refinance its loans as yields rise.
News that European leaders are unlikely to take a decision
on how to strengthen the euro zone's bailout fund until June
also weighed on the single currency.
The euro was little changed on the day at $1.4085,
having slipped as low as $1.4071. Traders said a further slide
had been stemmed by bank bids around the $1.4070 area.
The euro has retreated after its rise earlier this week
stalled at $1.4249, its highest level since early November.
"We have seen the top in EUR/USD for now," said a trader at
a European bank in Singapore, adding he would sell into any
rally towards $1.4140 and add to short positions around $1.40.
"We will see it back to $1.3850 pretty soon on the back of
too much optimistic sentiment priced into the euro."
The mid-$1.3850 region is considered key support, given that
the single currency rose to $1.3862 in early February during a
sharp rally at the start of the year. It later pulled back
before embarking on its latest climb.
Above that, the euro could be cushioned in the $1.4015-55
area, which contains a series of intraday highs hit earlier this
month.
Some analysts say the euro is unlikely to enter a protracted
downtrend at this point, given expectations the European Central
Bank will raise interest rates as early as April.
This would support the single currency as it would boost its
rate differential against the dollar and other lower-yielding
currencies.
But others in the market question the ECB's intent to
tighten monetary policy at a time when some euro zone countries
are suffering from fiscal issues, an issue which may haunt the
euro in the future.
DOLLAR SUPPORTED
The euro's latest drop gave some reprieve to the dollar.
The dollar index, which measures the dollar's value against
a basket of currencies, edged up 0.2 percent to 75.936 ,
clinging to the gains it made on Wednesday.
Against the yen, the dollar held steady from late U.S. trade
at 81.00 yen .
Market players are wary that Japan may intervene further to
sell the yen if the dollar drops below 80 yen, and especially if
such a move occurs in volatile trade as was the case last week,
when the yen hit a post-World War Two record high of 76.25 to
the dollar.
At the same time, traders say Japanese exporters are likely
to sell the dollar on any rallies, helping keep the yen stuck in
a thin range against the dollar. Traders cited some selling
demand from Japanese exporters around the 81.00 level.
Some argued that the longer the dollar hovers above 80 yen
ahead of Japan's fiscal year end next week, the more exporters
may be forced to lower their dollar-selling offers, which may
see the U.S. currency weaken in the coming days.
Sterling was flat at $1.6230 , on the backfoot after
it fell on Wednesday when the British government cut its growth
forecasts and said borrowing would fall more slowly than hoped.
The pound also struggled after minutes from the latest Bank
of England policy meeting showed policymakers were less hawkish
than some market watchers had expected. Investors are pricing in
a UK interest rate rise in July.
(Additional reporting by Reuters FX analyst Rick Lloyd in
Singapore; Editing by Kim COghill)
