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Euro on pace for largest drop since March

  • German election knocks euro lower
  • New Zealand election hurts kiwi
  • Dollar gains broadly
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Dan Kitwood | Getty Images

The euro hit its lowest price against the dollar since August on Monday and was on pace for its largest one-day percentage drop since March.

The euro fell after a weekend victory for German Chancellor Angela Merkel that was accompanied by a surge in support for the far right. Support for Merkel's conservatives unexpectedly slumped to its lowest since 1949 and the Social Democrats, partners in the outgoing coalition, said they would go into opposition.

"Markets dont like uncertainty and the German election results have injected a healthy dose of (that)," said Richard Falkenhall, a strategist at SEB AB in Stockholm.

The euro was last down nearly 1 percent against the dollar and down 0.76 percent against sterling.

The euro has been one of the best performing currencies against the greenback this year, having gained more than 13 percent against the dollar.

The German election results mean "the process of building a coalition could take months and that the resulting agreement will be a much weaker government in the euro zones largest economy," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in a note to clients.

The news from Germany is likely to refocus investor attention on other political events in Europe, particularly a divisive independence referendum in Catalonia on Oct. 1 and Italian elections next year.

Markets may conclude that the political backdrop in the euro zone remains disjointed and poses a threat to investment potential in the medium term, Rabobank strategists said in a client note.

The dollar also surged 0.98 percent against the New Zealand dollar following that country's election over the weekend, which left the ruling National Party short of the necessary votes to rule without forming a coalition.

"The opposition Labour Party and the nationalist New Zealand First party have enough combined votes to form a coalition on their own, which increases the political uncertainty and saps the kiwi, which has long benefited from a stable political backdrop ... a key source of the currencys support," Esiner said.

The dollar gained 0.53 percent against a broad basket of currencies as investors reduced short bets against it.