Euro retreats as investors fret over German election

(iStock)
(iStock)

New York - The euro slid back under $1.18 for the first time in a month on Tuesday as investors worried about the difficulties Angela Merkel will have putting together a government coalition in Germany and the implications for Europe.

The lower euro helped European stocks hold their ground and brush off a drop in Tokyo as US-North Korea tensions flared once more.

US stocks were mixed, with the tech-rich Nasdaq recovering some of the losses from the prior day's pullback, but the Dow dipping.

"Political uncertainty after the German election has sent the euro tumbling to a one-month low against the dollar," said market analyst Jasper Lawler at London Capital Group.

On Sunday, Merkel won a fourth term as chancellor, but a hard-right opposition party gained parliamentary seats for the first time.

"The impact of rising nationalism and a possible coalition between Merkel's CDU/CSU with the Liberal Party is already seemingly affecting German policy," said Lawler, pointing to a series of official statements opposing elements of French President Emmanuel Macron's speech pushing for greater European integration.

"We view the long-term viability of the euro as hinged on EU fiscal integration," he added.

Meanwhile, US Federal Reserve Chair Janet Yellen reiterated that she expects gradual interest rate increases will be appropriate, but acknowledged there was a possibility policymakers had "misjudged" the situation and low inflation might be more than just transitory.

BK Asset Management's Kathy Lien said the dollar, while higher, largely shrugged off Yellen's "hawkish" comments, likely in anticipation of anticipated action by the European Central Bank to trim stimulus.

The euro's resilience "is a sign that investors have their eyes on the prize - that is the ECB is still widely expected to announce plans to reduce its balance sheet in less than two weeks’ time," Lien said.

"This imminent change overshadowed the Fed's potential move in December."

Oil prices meanwhile retreated following Monday's surge. The rally had come after Turkish President Recep Tayyip Erdogan threatened to block key crude exports from Iraq's Kurdish region, which is holding an independence referendum.

Brent jumped nearly four percent to its highest level since July 2015, while US benchmark West Texas Intermediate piled on three percent on Monday. But both contracts retreated Tuesday.

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