EUR/USD Drops As Merkel Faces Hard Work On New Coalition
The euro dropped in early Asia on Monday as German Chancellor Angela Merkel faces a tough job of forging a new coalition that could see her lead a minority governement as the far-right AfD party won a surprise gain in votes and enters parliament for the first time.
The AfD stunned the establishment by finishing third and entering parliament for the first time, with 13.5% of the vote. Under Germany's mixed-member proportional voting system, that vaults in well beyond the 5% threshold needed for seats in parliament.
Chancellor Angela Merkel's CDU and Bavarian allies, the Christian Social Union (CSU), won 32.5% of the vote, making them by far the largest parliamentary group, according to an exit poll for the broadcaster ARD, but that is down from 41.5% in the last election in 2013 and lower than recent polling. Their closest rivals, the center-left Social Democrats (SPD), slumped to 20.0%, a new post-war low.
Merkel now needs to work to form a coalition reportedly without the SPD, a process that will likely involve protracted negotiations.
The U.S. dollar index, which measures the greenback’s strength against a trade-weighted basket of six major currencies, was last quoted down 0.02% to 91.95.
Ahead this week, market players will turn their attention to fresh comments from Fed Chair Janet Yellen as expectations start to grow for a December rate hike. Investors will be focusing on a pair of speeches from ECB President Mario Draghi as well as remarks from the heads of central banks in the UK, Canada and Japan.
Last week, the dollar slid against the yen on Friday, snapping five days of gains as heightened tensions on the Korean peninsula bolstered safe haven demand for the Japanese currency.
The yen gained ground after North Korea said on Friday it could test a hydrogen bomb over the Pacific Ocean after U.S. President Donald Trump threatened to “totally destroy” the country if the U.S. was forced to defend itself or its allies.
The remarks added to concerns that the escalating rhetoric could lead to one side misinterpreting the other, with dangerous consequences.
The dollar hit the highest level since mid-July against the yen on Thursday after the Bank of Japan kept monetary policy unchanged. The move higher in the dollar was also prompted by the Federal Reserve’s policy statement on Wednesday in which it indicated that it is still on track to raise interest rates in December.
The single currency touched the day’s highs after robust economic data out of the euro zone underlined expectations for tighter monetary policy from the European Central Bank.
Sterling remained on the defensive after a closely watch speech by British Prime Minister Theresa May gave few new indications on how Brexit will proceed.
May proposed a transition period of around two years after UK leaves the European Union, during which time access to the single market will continue on current terms