The single currency has snapped a two-day rising streak and edged lower after German Chancellor Angela Merkel won a fourth term but faces tough coalition choices, with markets sensing an increasing risk for Europe.
Investors cooled on the euro after Angela Merkel's ruling Christian Democrat-led alliance took a hit in the German election at the weekend. The single currency weakened as much as 0.5 percent against the US dollar in early Asia trade before recovering slightly to be 0.2 weaker at $1.1934 in European trading on Monday.
Although securing a comfortable 32.7 percent of the vote, a loss of about 9 percent support means Merkel's only option to form a government is a complex three-way tie-up with the environmentalist Greens and the liberal Free Democrats.
Ulrich Stephan, a senior Deutsche Bank analyst, said coalition talks were sure to become tedious. "Issues such as digitization and education, as well as tax, energy and EU policy are very contentious among them," he said in a note.
But Mark Haefele, Chief Investment Officer at UBS, believes the euro's decline will be short-lived. "While it is possible that the euro [reflects] disappointment over the absence of a grand coalition, the presence of the liberal Free Democrats [FDP] in government could lead to stronger German pressure for fiscal discipline in peripheral countries, a long-term positive for the currency," he said.
While the yield on Germany’s benchmark 10-year sovereign debt is flat at 0.44 percent, yields on the edge of the euro currency area, where economic performance is less robust and government spending is looser, are rising as investors sell the debt. The move comes amid concern that the new politics in Germany will make the eurozone’s main economic power more likely to take a tougher line on fiscal discipline in the currency area. The likely presence of the Free Democrats in the new coalition makes such an approach more probable.
Merkel's conservative CDU/CSU party alliance recorded its worst election result since 1949 as the anti-immigration Alternative for Germany (AfD), which capitalized on the country's refugee crisis, is set to become the first rightwing nationalist party since the Nazis to enter the German parliament.
Germany's stock market on Monday seemed to brush off inroads made by the country's hard-right opposition party in national elections. After opening trades reflected some worries about a heightened risk of German political volatility, sending the German blue-chip Dax index down 0.2 percent, stocks rebounded by midday rising 0.3 percent. Still, the DAX ended the day flat, just below a 10-week high hit on Friday.
"While Germany looks set for lengthy coalition negotiations... we don't expect political uncertainty to materially dent business sentiment or economic growth" in Europe's biggest economy, said Stephen Brown, economist at Capital Economics research group. "September's fall in German... business sentiment still leaves it pointing to very strong GDP growth," the expert added.
uhe/kd (Reuters, dpa)