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June 28 Reuters The euro was on track for its biggest monthly fall since January as political uncertainty weighed in the run up to France39;s general elections, while the dollar jumped to a near fourdecade high against the battered yen ahead of key inflation data.

Investors fear that a new French government could increase fiscal spending, threatening the sustainability of the country39;s public debt and the financial stability of the bloc.

At the same time, traders are cautiously testing Japan39;s determination to protect its currency while keeping a keen eye on crucial U.S. inflation data.

The euro was down 0.05 at 1.0695, and set to end the month with a 1.33 drop, the biggest since January, when it fell by 1.99.

The risk premium investors demand to hold French government bonds rose to its highest since 2012 on Friday ahead of the first round of voting this weekend in the country39;s parliamentary elections, as investors expect a new government led by a farright or farleft coalition to increase fiscal spending.

The markets remain priced for a relatively benign scenario of a gridlocked legislature or a Rassemblement Nationale RN government, which only partially implements its manifesto, said Aman Bansal, director of European rate strategy at Citi.

He added that the…