Euro Drops After German Coalition Talks Collapse
November 19 2017 - 11:07PM
Dow Jones News
By Saumya Vaishampayan
The euro fell on Monday in Asia after Chancellor Angela Merkel's
efforts to form a government in Germany collapsed overnight,
leaving the eurozone's largest economy in political limbo almost
two months after its general election.
The currency fell as much as 0.6% against the U.S. dollar,
though it has since recouped some of its losses, according to
Thomson Reuters data. In recent action, the euro was down 0.4% at
$1.1743. The euro also lost 0.5% against the Japanese yen and 0.3%
against the British pound.
Ms. Merkel's conservative alliance won the September election
but finished with its worst result since 1949, forcing the longtime
German leader to try to cobble together a coalition with a majority
in Parliament. That effort hit a roadblock late Sunday in Germany
after the chairman of the small, pro-business Free Democratic Party
ended talks with Ms. Merkel's conservative camp and the center-left
Greens.
"It's very concerning, and creates this big uncertainty in the
eurozone, " said Kisoo Park, a global bond manager at Manulife
Asset Management in Hong Kong, adding that he expects the euro to
fall further in the short term.
The collapse of coalition talks in Germany is the latest episode
of political turmoil to hit the region. Spain has cracked down on
the region of Catalonia after it declared independence following a
referendum the Madrid government had deemed illegal. Meanwhile, the
U.K. has made little progress in its divorce proceedings from the
European Union, which has major implications for trade and the
common currency.
The prospect of prolonged political uncertainty in Germany is
particularly worrying for markets. Ms. Merkel has long been seen as
Europe's pre-eminent political leader, having steered Germany
through both the global financial crisis and the subsequent crisis
in Greece.
Her decision to let in hundreds of thousands of refugees and
migrants from Syria and other countries in 2015 stoked strong
domestic opposition, however. Anti-immigration party Alternative
for Germany performed strongly in September's election, winning
some 13% of the vote.
"Germany has been the more stable country in the region and
globally, but if that goes away, then that could cause a cascade of
fallouts," said Mr. Park, citing possible effects on the Brexit
talks and parliamentary elections due next year in Italy.
Ms. Merkel will continue to lead a caretaker government in
Germany for now. The chancellor could try again to woo enough
parties to form a ruling coalition, or attempt to run a minority
government. A further option is for Germany to have a fresh general
election.
Despite periodic political problems in Europe this year, the
euro has surged nearly 12% against the U.S. dollar. The common
currency has also advanced roughly 7% against the yen and 4.4%
against the British pound so far in 2017.
"What we've seen globally is a shift to more extreme parties.
The euro has managed to ride this out, and the reaction in the euro
[this year] has been much more dependent on growth," said Mitul
Kotecha, head of Asia foreign-exchange and rates strategy at
Barclays in Singapore.
The eurozone economy is on track for its strongest year since
2007, though growth slowed slightly in the third quarter and
inflation fell. That combination of improved economic growth and
low inflation should ensure that the European Central Bank will
begin reducing its monthly bond purchases slowly, much like the
Federal Reserve, as it begins to unwind its easy monetary
policy.
Mr. Kotecha said he still expects the euro to end 2017 at $1.17,
near its current level, and he expects the euro to rise further
next year, driven by improving growth and a weaker dollar.
The WSJ Dollar Index rose 0.2% on Monday in Asia, helped by the
euro's decline. Investors continue to focus on the odds of a tax
bill passing in the Senate, which is scheduled for a vote after
Thanksgiving.
Andrea Thomas contributed to this article.
Write to Saumya Vaishampayan at saumya.vaishampayan@wsj.com
(END) Dow Jones Newswires
November 19, 2017 22:52 ET (03:52 GMT)
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