The euro snapped a two-day rising streak and edged lower on Monday after the German election results prompted some investors to lock profits into one of the most profitable currency trades of the year.
Money managers have piled into the single currency and related bets in 2017, particularly European equities, as the euro zone economy regained momentum and its monetary policy outlook diverged from its counterparts in the United States and Japan, pushing the euro up more than 13 percent this year.
“The impact is limited as the German election results is more of a domestic political story for now rather than a regional European trend and the euro will be more sensitive to any shift in direction from the European Central Bank policy,” said Viraj Patel, an FX strategist at ING Bank in London.
The euro slipped 0.4 percent to $1.1912 against the dollar on Monday but was higher against the Swiss franc and was broadly flat against the Japanese yen.
Merkel did win a fourth term in office on Sunday but will have to build an uneasy coalition to form a government after her conservatives haemorrhaged support in the face of a surge by the anti-immigration Alternative for Germany (AfD).
Despite winning the most votes, Merkel’s bloc slumped to its worst result since 1949 and her current Social Democrat coalition partners said they would go into opposition after tumbling to 20.7 percent in projections, a post-war low.
The German election results are not a game changer for markets with the outcome likely positive for German equities, Michael Strobaek, global chief investment officer at Credit Suisse said in a note to clients.
Elsewhere, the dollar gained against a broad basket of currencies, rising 0.15 percent on the day as investors reduced some short bets against the greenback.
Latest positioning data showed short bets on the dollar against a broad basket of currencies at their highest level since January 2013.