FOREX-Euro inches higher in face of French politics

* Yen chief loser as stock market mood improves

* Euro higher as French leftists make no progress on unity

* Graphic: World FX rates in 2016 http://tmsnrt.rs/2egbfVh

By Patrick Graham

LONDON, Feb 20 (Reuters) - The euro rode out signs of gains for far-right French presidential candidate Marine Le Pen (Other OTC: PENC - news) on Monday, inching higher against the dollar and the yen in trade held in check by the absence of U.S. investors for a holiday.

French bond yields - the main measure of concern over Le Pen's chances in April and May - showed the biggest gap to German equivalents since 2012 after a poll showed the head-to-head gap to centrist favourite Emmanuel Macron closing.

But the euro held onto some minimal gains through the European morning, gaining 0.1 percent to $1.0616 and 0.3 percent to 120.06 yen respectively.

"This stuff is getting played out in the OAT (French government) yields rather than the currency," said the head of FX sales with one large international bank in London.

"Newswise I think most people think Le Pen will make it thru to the second round and then won't get any further. That is just the consensus at the moment."

News that Socialist Benoit Hamon and hard-left rival Jean-Luc Melanchon were discussing cooperation in their bid for the presidency weakened the euro and supported the yen on Friday.

Investors believe such a tie-up could either backfire and propel anti-globalisation, anti-EU candidate Le Pen into the Elysee palace or succeed and land France with a far-left president pursuing deficit-boosting economic policies.

But policy proposals outlined by Melanchon on Sunday underscored the gap he would have to bridge with Hamon to find a common platform for the April and May polls, also helping the euro.

"If they did unite then any outcome would be a bad outcome from the market's point of view," said Richard Benson, co-head of portfolio investment with currency fund Millennium Global in London.

"It was what caused the risk-off move on Friday, although the interesting thing was it seemed to play out more on dollar-yen than the euro. In general the market does seem very nervous."

The start of 2017 on currency markets has been dominated by disappointment with U.S. President Donald Trump's early fiscal and tax policies, turning back a reflation trade on the dollar that had bet on swift moves to encourage repatriation of capital to the United States and boost spending.

Millennium's Benson said Trump's State of the Union speech in 10 days time might be crucial for those trades.

Trade on Monday was cooled, however, by the absence of U.S. markets for the Presidents Day holiday.

Stock markets in both Europe and Asia eked out some gains, pointing to a broadly more positive mood. That tends to benefit several of the major currencies at the expense of "safe havens" like the yen and Swiss franc.

"After last week's robust performance from the S&P index, Asian equities are modestly higher, commodity prices mostly knocking around at the higher end of ranges and in FX, that translates into a yield-hunting market," said Societe Generale (Swiss: 519928.SW - news) analyst Kit Juckes. "The yen is the obvious loser."

For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets (Editing by Dominic Evans)