By Jemima Kelly
LONDON (Reuters) – The euro recovered from a two-month low against the yen touched in Asian trade on Monday, with investors brushing off the broader political risks of a failure of German Chancellor Angela Merkel to form a three-way coalition government.
Merkel, whose conservatives were weakened after they won an election in September with a reduced number of seats, said she would inform the German president that she could not form a coalition, after the pro-business Free Democrats withdrew from negotiations.
The development thrust Germany into a political crisis that raised worries among investors of a new election if Merkel cannot form a minority government.
The main fear in that scenario would be that the far-right, anti-immigrant Alternative for Germany (AfD) party could add to the 13 percent of votes it secured in September. But the parliamentary process required to get through another election is considered to be quite difficult, involving more than one vote in the German parliament.
After selling off sharply in early deals in Asia, trading down as much as 0.8 percent to hit 131.16 yen (EURJPY=EBS), its weakest since Sept. 15, the euro rebounded as much as 1 percent to trade slightly higher on the day, at 132.33 yen.
“There was a substantial move in Asia, but what I think is more relevant is the European trading hours, and we can already see a slight recovery,” said Commerzbank (DE:CBKG) currency strategist Esther Reichelt, in Frankfurt.
“So there’s no panic in the market at all – it’s really a European story,” she added. “We’re not seeing a broad risk-off move here.”
The dollar had also sold off against the yen – generally sought at times of uncertainty – in Asian trading, dipping to a one-month low . But it turned slightly higher against the Japanese currency in European trading, at 112.05 yen.
The euro fell as much as 0.5 percent against the dollar in Asian trading to $1.1722 , pulling away from a one-month high of $1.1862 set on Wednesday last week. But it recovered to trade up 0.1 percent on the day at $1.1802 in London trade.
“Maybe what markets are saying overall is that minority government or further coalition talks are fine, as long as the economy is growing,” wrote Societe Generale (PA:SOGN) macro strategist Kit Juckes, in London.
Many analysts expect this to be a relatively calm week of trading.
“With U.S. markets on Thanksgiving holiday from Thursday and little data catalysts in the G10 calendar, global markets may take a leaf out of the mindfulness playbook this week and embrace the relative serenity here and now,” wrote ING currency strategists in a note to clients.