LONDON (Reuters) – The euro slipped to a one-month low on Tuesday after its worst day so far this year, as investors worried that months of coalition talks in Germany could weigh on the economy and would make closer euro zone integration difficult.
German Chancellor Angela Merkel, who won a fourth term in elections on Sunday but now faces a tough juggling act to form a government with other parties, on Monday struck a note of caution with respect to French calls for fiscal union.
French President Emmanuel Macron, who wants a fundamental overhaul of the European Union’s single currency zone and whose ideas include creating a euro zone budget and a euro zone finance minister, will lay out his plans in a speech in Paris on Tuesday.
But the results of Germany’s election have forced Merkel to consider a new coalition including the liberal Free Democrats (FDP), a party critical of Macron’s ideas on Europe, and investors are therefore worried the reforms that they would welcome will not end up going through.
The euro slipped as low as $1.1811 EUR= in morning trade in London, its weakest since Aug. 25, after falling around 0.9 percent on Monday – its heaviest one-day loss since December.
Commerzbank currency strategist Thu Lan Nguyen, in Frankfurt, said hopes for greater euro zone integration had been the main cause of a more than 10 percent appreciation by the euro against the dollar since the first round of France’s presidential election.
“The euro has been appreciating since the French elections because of the push by Macron for fiscal union,” she said. “There is some uncertainty (over that) in the market now against the background of the German elections.”
The euro faced additional pressure on Monday after European Central Bank President Mario Draghi singled out currency volatility as a source of uncertainty that required monitoring and argued that “ample” ECB accommodation was still needed, because a premature and hasty move could unravel its work.
The euro had risen to a 2-1/2-year high of $1.2092 soon after the ECB’s Sept. 7 policy meeting, with euro bulls buoyed by the central bank’s signal of an eventual end to its large bond-buying scheme, while the dollar’s weakness has also helped.
The dollar was flat at 111.73 yen JPY=, having earlier dipped against the Japanese currency as worries over North Korea flared up again amid an escalating war of words between it and the United States.
The yen made sharp gains versus the greenback on Monday after the North Korean foreign minister said President Donald Trump had declared war on the country and that Pyongyang reserved the right to take countermeasures, including shooting down U.S. bombers even if not in its air space.
“The dollar tends to fall on flare-ups in North Korean-related matters, but whether the Federal Reserve can hike interest rates in December as they projected still remains the ultimate decider (of dollar direction),” said Shin Kadota, senior strategist at Barclays in Tokyo.
The dollar index, which measures the greenback against a basket of six major currencies but is heavily skewed towards the euro, hit its highest in four weeks .DXY.
Immediate focus was on what views might be expressed by Fed Chair Janet Yellen, who is due to speak in Cleveland at 1645 GMT on “inflation, uncertainty, and monetary policy.”
New Zealand’s dollar extended the previous day’s slide and was down 0.6 percent at $0.7223 NZD=D4, having sunk after New Zealand’s National Party won the largest number of votes in Saturday’s election but not enough seats to govern outright. [AUD/]
Reporting by Jemima Kelly; Additional reporting by Shinichi Saoshiro in Tokyo; editing by John Stonestreet