SINGAPORE: The euro marched higher on Monday after Germany’s opposition conservatives won the national election as expected, while the dollar tumbled to its weakest in more than two months on mounting worries over the growth outlook of the US economy.
Friedrich Merz was set to become Germany’s next chancellor after his party emerged victorious in Sunday’s election, though he faces complex and lengthy coalition negotiations after the far-right Alternative for Germany (AfD) surged to a historic second place in a fractured vote.
The euro extended gains from early in the session to touch a one-month high of $1.0528 and last traded 0.5% firmer at $1.0512.
Investors’ focus is now on how quickly Merz’s party can form a coalition government to bring about much-needed change to a frail economy.
“The fragmentation of Germany’s political landscape will make the upcoming coalition negotiations very complicated,” said Carsten Brzeski, global head of macro for ING Research.
“The risk is high that after tonight, the longing for a significant overhaul of the German economy will last much longer.
It is hard to see that the next government will be able to deliver much more for the economy than a short-lived positive impact from some tax cuts, small reforms and a bit more investment.“
In the broader market, the dollar slid ahead of a busy week packed with US economic data and speeches from various Federal Reserve officials.
Trading was thin on Monday with Japanese markets closed for a public holiday.
Sterling pushed to a two-month top of $1.2690 due to the weaker greenback, while the yen similarly peaked at 148.85 per dollar, its strongest level since early December.
Against a basket of currencies, the dollar fell to a more than two-month low of 106.12.
The greenback has slid more than 3% from its January peak as traders reasoned the start of Donald Trump’s second term has been mostly bluster on tariffs, leaving little appetite for them to load up on fresh dollar holdings.
Also adding to headwinds for the dollar were falling US Treasury yields on heightened bets of more Fed cuts this year, amid growing concerns over the outlook for the world’s largest economy.
Data on Friday showed US business activity nearly stalled in February - the latest in a string of surveys to suggest that businesses and consumers were becoming increasingly rattled by the Trump administration’s policies.
Later this week, investors will get the second estimate of fourth quarter growth figures in the US and January’s core PCE price index data.
“It’s a week where the market could feasibly respond to any economic data point,” said Chris Weston, head of research at Pepperstone.
“With US growth concerns building traction, the market’s reaction function is now heavily skewed to any downside in the data outcomes.”
Elsewhere, the Aussie was up 0.26% at $0.6376, not far off from a 2-1/2-month high.
The New Zealand dollar similarly rose 0.23% to $0.5755.
The Swiss franc was last at 0.8962 per dollar, having also scaled a two-month peak of 0.8955 earlier in the session.
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