Euro flattens as tight German election promises slow progress in forming new government

By Geoffrey Smith – The dollar opened flat against the euro on Monday after a narrow center-left victory in the German parliamentary elections.

The center-left Social Democratic Party won the largest share of the vote, with preliminary estimates showing it at 26%, two percentage points ahead of the center-right Christian Democratic bloc. Thus, the party of pensioner Angela Merkel is expected to enter the opposition for the first time in 16 years.

Any fear of radical change under a new government has been tempered by the poor performance of the far-left Linke party, which has virtually ruled out any chance of him joining the new government.

“The extreme risk of significant tax hikes, a denser regulatory network, reform reversals and a tight cover on housing rents has evaporated,” said Holger Schmieding, chief economist of the Berenberg Bank in Berlin.

However, the rigor of the result means that the next government will need three parties to have a majority in the Bundestag. The third and fourth parties, the pro-business Greens and Free Democrats, have indicated that they will work with either of the larger parties. This suggests that coalition building negotiations are likely to be complex and time consuming.

At 3:00 a.m. ET (07:00 GMT), the euro was at $ 1.1711, unchanged from Friday night in Europe. It was also unchanged against the British pound at 0.8561, failing to gain ground despite growing signs of crisis emerging from the UK economy. More than half of gas stations across the country are said to be without fuel this weekend after reports of shortages sparked a nationwide wave of panic buying. Prime Minister Boris Johnson, after signaling a withdrawal to allow EU truck drivers to work temporarily in the UK on Friday, was earlier reported planning to send military drivers to ensure deliveries.

Elsewhere, the dollar and euro appreciated against the Swiss franc as risk aversion eased in response to the deal, signaling a slight easing of tensions between the United States and China on Friday. Huawei CFO Meng Wanzhou will be released and allowed to return to China after a compromise deal. Meng was arrested in Canada nearly three years ago at the request of President Donald Trump’s Justice Department.

USD / CHF rose 0.3% to 0.9271 while EUR / CHF rose 0.3% to 1.0855.

In emerging markets, the Russian ruble hit its highest level in nearly a week as crude oil prices continued to rise, while the Turkish lira appeared to bottom after falling dramatically in response to a surprise interest rate cut by the country’s central bank on Thursday. USD / RUB fell 0.2% to 72.5972, while USD / TRY fell 0.1% to 8.8677.

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