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[LONDON] The euro slid back under US$1.18 for the first time in a month on Tuesday as investors worried about the difficulties Angela Merkel will have putting together a government coalition in Germany and the implications for Europe.
The lower euro helped European stocks hold their ground and brush off a drop in Tokyo as US-North Korea tensions flared once more.
In afternoon trading, Frankfurt's DAX 30 index was up 0.2 per cent compared with the close Monday and the Paris CAC 40 was flat. London slipped 0.05 per cent.
Wall Street opened higher, with the Dow adding 0.1 per cent.
"Political uncertainty after the German election has sent the euro tumbling to a one-month low against the dollar," said market analyst Jasper Lawler at London Capital Group.
On Sunday Angela Merkel won a fourth term as chancellor, but a hard-right opposition party gained parliamentary seats for the first time.
"The impact of rising nationalism and a possible coalition between Merkel's CDU/CSU with the Liberal Party is already seemingly affecting German policy," said Lawler, pointing to a series of official statements opposing elements of French President Emmanuel Macron's speech pushing for greater European integration.
"We view the long-term viability of the euro as hinged on EU fiscal integration," added Mr Lawler.
However, Craig Erlam, senior market analyst at currency trading platform Oanda, sees the selloff as booking profits from the recent run-up in the value of the euro.
"Rather than being a source of negativity for the euro, I think traders are seeing the election as an opportunity to lock in some profits which is triggering a small but arguably necessary correction," he said in a note to clients.
Also in focus Tuesday for Germany and France was the maker of iconic TGV trains, Alstom, set to announce a merger with industrial leader Siemens in a giant and politically tricky deal that would create a new European champion.
The board of partly state-controlled Alstom, the manufacturer of French high-speed trains which are a source of national pride, was set to meet on Tuesday to discuss the tie-up with its German competitor.
Alstom shares slid 0.1 per cent to 33.39 euros in Paris, while Siemens shares climbed 0.7 per cent to 117.25 euros.
Earlier Tuesday, Asian stock markets mostly retreated while haven assets such as gold and the yen won support after Pyongyang accused President Donald Trump of declaring war on the country and warned it could shoot down US bombers. The yen later gave up those gains, as did gold.
The US dollar held its ground following conflicting comments from top Federal Reserve officials over the timing of the bank's next rise for US interest rates.
Oil prices meanwhile retreated following Monday's surge. The rally had come after Turkish President Recep Tayyip Erdogan threatened to block key crude exports from Iraq's Kurdish region, which is holding an independence referendum.
Brent jumped nearly four percent to its highest level since July 2015, while US benchmark West Texas Intermediate piled on three percent on Monday.
Greg McKenna, market strategist at AxiTrader, said crude prices were supported also by signs that a push by Opec and other key producers aimed at cutting output was bearing fruit.
"Oil markets have a better tone at the moment as the notion that the Opec/non-Opec production deal is gaining traction and the market is rebalancing," he said.