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French election risk being unwound - analyst

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Yen slumps as Japan intervention risks grow

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U.S. manufacturing index comes in lower than expected

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U.S. construction spending falls

(Adds new comment, byline, bullet points, U.S. data, FX table)

By Harry Robertson and Gertrude Chavez-Dreyfuss

LONDON/NEW YORK, July 1 (Reuters) - The euro climbed on Monday

after a convincing and historic win by the French far right in the

first round of parliamentary elections fell slightly short of some

expectations, leaving the final result dependent on party deals before

a second round next weekend.

Meanwhile, the yen sank to a new 38-year low after data showed

Japan's economy shrank more than initially reported in the first

quarter, leaving traders on alert for signs of intervention to prop up

the currency.

Marine Le Pen's far-right National Rally (RN) party won the first

round of France's parliamentary elections on Sunday by a large margin,

exit polls showed, although analysts noted it won a smaller share of

the vote than some polls had initially projected, triggering a rally

in stocks and bonds.

The euro was last 0.4% higher at $1.0753, having earlier

climbed to a two-week high. It has lost around 1.3% since the French

far right triumphed in European parliamentary elections in early June,

prompting President Emmanuel Macron to call a snap domestic election.

"It's an alleviation of risks. We're seeing a lot of hedges going

into the French election getting unwound," said Simon Harvey, head of

FX analysis, at Monex Europe in London.

Investors have been concerned that the RN could come to power

through "cohabitation" with Macron and push a high-spending and

euro-sceptic agenda.

"First round results are not offering much certainty about the

composition of the parliament, and the second round scheduled for next

weekend is in fact the big risk event," said Francesco Pesole,

currency strategist at ING.

Pesole also said the fact that the left-wing coalition, which also

wants to boost government spending, did not receive more votes than

expected was likely boosting the euro too.

The rise in the euro sent the dollar a touch lower against a

basket of currencies, though the greenback was on the back foot after

data on Friday showed U.S. inflation cooled in May, cementing

expectations the Federal Reserve will begin cutting interest rates

later this year.

The dollar index was last flat on the day at 105.72.

Against the dollar, sterling rose 0.2% to $1.2674, while

the Aussie was down 0.1% at US$0.6665.

The dollar slipped after data showed after a U.S. manufacturing

index fell 48.1 in June, lower than the forecast of 49.1.

U.S. construction spending for May also came in weaker than

expected, falling 0.1%, compared with expectations for a 0.2% rise.

Market pricing now points to about a 63% chance of a Fed cut in

September, as compared to a 55% chance a month ago, according to the

CME FedWatch tool.

YEN UNDER PRESSURE

The yen fell to another 38-year low against the

greeenback, sliding to 161.58 yen per dollar. The U.S. currency was

last up 0.4% at 161.57.

The yen has fallen more than 12% this year, with its latest

decline to the weaker side of 160 per dollar keeping investors on

heightened alert for intervention from Japanese authorities to prop up

the currency.

"In terms of line in the sand, we have two. We have 163 and if

this evolves relatively quickly in the next two to three weeks, I see

the Bank of Japan would intervene in the market to purely stem or slow

the pace of depreciation," said Monex's Harvey.

"If they don't intervene at 163, then obviously 165 stands out as

the next psychological level based on current fundamentals."

Data showing weaker-than-expected economic growth added to the

uncertainty about the Bank of Japan's next move in interest rates.

The BoJ meets in late July and has hinted that it could raise

borrowing costs, potentially helping close the yawning gap between

Japanese and U.S. rates that has hammered the yen this year by causing

investors to flock to the higher returns on U.S. bonds.

Separate data on Monday showed the business mood in Japan's

service-sector soured in June, offsetting a big lift in factory

confidence.

Currency

bid

prices at

1 July​

02:40

p.m. GMT

Descripti RIC Last U.S. Pct YTD Pct High Low

on Close Change Bid Bid

Previous

Session

Dollar 42

Euro/Doll 718

Dollar/Ye 82

Euro/Yen 61

Dollar/Sw 84

Sterling/ 718​

Dollar/Ca 6

Aussie/Do 652

Euro/Swis 46

Euro/Ster 75

NZ 76

llar

Dollar/No 024

Euro/Norw 119

Dollar/Sw 41

Euro/Swed 436