Euro slides as German far right surge sours Merkel win

The euro slipped on Monday after the German chancellor Angela Merkel won a fourth term but faced a fractured parliament as support for the far-right surged, while Asian shares pulled back, weighed by concerns about China’s economy.

The New Zealand dollar also took a hit as the Pacific country’s ruling National Party won the largest number votes in a weekend election but failed to secure a ruling majority, with a protracted period of coalition building now a possibility.

The euro was down 0.2 per cent at US$1.193, putting more distance between a 30-monthhigh of $1.2092 reached on September 8, when a European Central Bank policy meeting left currency bulls optimistic the ECB would begin tapering its big stimulus programme.

MSCI’s broadest index of Asia-Pacific shares outside Japan handed back earlier modest gains and was last down 0.35 per cent with losses across the regions weighing.

Two years after Merkel left German borders open to more than 1 million migrants, the anti-immigration Alternative for Germany (AfD) stunned the establishment by becoming the first far-right party to enter parliament in more than half a century.

“The market reacted by selling the euro on the possibility of Mrs Merkel running into difficulties in forging a coalition. The euro, however, was already losing support from the European Central Bank’s monetary policy theme and appeared to be on its way lower,” said Daisuke Karakama, the chief market economist at Mizuho Bank in Tokyo.

“The election outcome in Germany showed the country was no longer a special presence in Europe amid growing support for populism and the far right.”

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In New Zealand, the kiwi, the world 11th most-traded currency, was down 1 per cent at $0.7270. It was at a six-week high of $0.7435 as recently as September 20, when speculation for a comfortable ruling party win had boosted the currency.

“While there are a few different scenarios and some potentially testy issues to negotiate, ultimately the political landscape appears as though it will remain relatively centralist and we are reasonably agnostic on what it all means,” wrote economists at ANZ bank.

Chinese stocks remained shaky after falling towards the end of last week following the Federal Reserve’s hawkish policy stance and S&P’s downgrade of China’s sovereign rating.

Hong Kong's Hang Seng was down 0.8 per cent and Shanghai slipped 0.3 per cent after a number of Chinese cities rolled out new cubs to further slow home property sales.

South Korea's KOSPI shed 0.4 per cent while Japan's Nikkei bucked the trend and rose 0.6 per cent thanks to the yen's weakening against the dollar.

The S&P 500 and Nasdaq closed slightly higher on Friday as worries about the Graham-Cassidy proposal to reform US health insurance eased and investors shrugged off concerns about North Korea.

The pound inched up after sliding on Friday, when the British prime minister Theresa May failed to give any concrete details for how Britain might retain preferential access to Europe’s single market after Brexit.

Sterling was up 0.2 pe rcent at $1.3528 after losing 0.6 per cent on Friday.

Its peers’ troubles lifted the dollar, with its index against a basket of six major currencies up 0.1 per cent at 92.257.

The greenback added 0.3 per cent at 112.320 yen, reversing losses suffered on Friday when the exchange of insults between the US president Donald Trump and North Korea heated up, sapping broader risk appetite.