FOREX-Euro slides as Draghi says prepared to act to keep rates low
* Euro fails to hold early gains after German election
* Merkel wins but must find coalition partner
* Euro zone PMIs improve, but German factory PMI dips
* Aussie rises as China manufacturing growth picks up
NEW YORK, Sept 23 (Reuters) - The euro fell across the board on Monday after European Central Bank President Mario Draghi said the ECB could cut interest rates further and flood the market with cheap money. Europe's common currency hit session lows against the dollar and yen after Draghi's remarks, extending earlier losses stemming from worries about how long it will take Angela Merkel to form a coalition after her party's victory in Sunday's German election. "With euro at $1.35, the pressure on the ECB to be as dovish as possible is really accelerating," said Boris Schlossberg, managing director at BK Asset Management in New York. "The unintended consequences of the Federal Reserve's no-taper move has come at the worst possible time when German manufacturing exports are beginning to slow. So I think monetary officials in Europe will do everything possible to try to dampen the rise in the euro." Draghi told the European Parliament on Monday that the ECB is ready to offer banks more long-term loans to keep money-market interest rates from rising to levels that could push inflation too low. He said euro zone interest rates would remain at current or even lower levels for some time. In midday trading, the euro was down 0.3 percent at $1.3486 , staying below chart resistance at last week's 7-1/2-month high of $1.3569. It fell 0.8 percent versus the yen, to 133.23. The euro did trim some losses against the dollar after remarks by the president of the New York Fed, William Dudley. Referring to the timeline that Fed Chairman Ben Bernanke articulated in June as to when the central bank would start to phase out its asset purchases, Dudley said the framework is "still very much intact." He noted that Bernanke did not specify that the first reduction in bond buying would come at the Fed's September meeting. Against the pound, the euro dropped 0.4 percent to 84.11 pence. The outcome of Germany's election drove the initial weakness in the euro. Merkel's conservatives fell short of the votes needed to rule on their own and may have to convince leftist rivals to join them in government. The German chancellor's victory came at the expense of the Free Democrat Party, a coalition partner of Merkel's last government, which failed to get the minimum 5 percent vote to qualify as a recognized party, meaning it cannot be considered for a coalition under the new government. "The uncertainty surrounding what a coalition might look like and the road to get to one has left the euro softer," said David Starkey, FX market analyst at Cambridge Mercantile Corp in London. Data showing above-forecast euro zone private sector business activity this month gave the single currency only a slight lift. Putting pressure on the euro were numbers showing that German manufacturing activity growth unexpectedly slowed, according to Markit purchasing managers' index data.
The euro has gained more than 3 percent against the dollar since hitting a low close to $1.31 on Sept. 6, and analysts said it could struggle to extend gains unless data consistently points to an improving euro zone economy. Tuesday's German Ifo sentiment data is likely to be closely watched.
GRIM DOLLAR OUTLOOK The dollar was flat against a basket of currencies at 80.472 , above a seven-month low of 80.060 set last week after the Fed surprised markets by keeping the pace of its bond-buying stimulus unchanged at its policy meeting last week. Comments by a top Fed official on Friday suggesting the central bank may scale back stimulus next month lent some support to the dollar. Analysts at UBS, however, said it "seems unlikely" the Fed would choose to act so soon after an unchanged policy decision. They said last week's Fed decision would keep the dollar weak for one quarter before its longer-term uptrend resumed and revised up their one- and three-month forecasts for euro/dollar to $1.37 and $1.35, from $1.30 and $1.28 previously. The growth-linked Australian dollar was up 0.6 percent at US$0.9446, after data showing China's factory sector growth accelerated in September. The dollar fell 0.5 percent to 98.76 yen, with traders saying it faced strong chart resistance before 100 yen.