Euro retreats from highs as German coalition talks eyed, dollar dips

By Chuck Mikolajczak

NEW YORK (Reuters) - The euro eased off highs from a brief rally on Monday as the focus shifted from the election victory of Germany's conservatives to how quickly a coalition government can be formed.

Friedrich Merz was set to become Germany's next chancellor after his party emerged victorious in Sunday's election, as expected, but coalition talks may be difficult and he could face an obstructive parliament after both far-right and far-left parties surged.

Merz said he was in talks with other parties to loosen a constitutionally enshrined 'debt brake' rule that limits the budget deficit to just 0.35% of national output, even before the new parliament is officially sworn in.

"The policy implications are twofold - one is the debt break in Germany," said Marc Chandler, chief market strategist at Bannockburn Global Forex in New York.

"That's important because it sets up the basis for the next thing, too, and that is Europe realizes that they have to step up their defense spending and it seems like the best way to do that is through a collective bond offering."

U.S. President Donald Trump said the United States is close to a minerals deal with Ukraine as he and French President Emmanuel Macron held talks that covered prospects for ending the Ukraine war despite stark differences on how to proceed.

The dollar index, which measures the greenback against a basket of currencies, slipped 0.07% to 106.57, after dipping to 106.12, its lowest since December 10. It is down more than 3% from a more than two-year high hit in January.

"The down move is over, just about over, and that's partly what the euro is telling us today, not just the euro but the other currencies," Chandler said. "Many of them made new highs for the move and now are selling off and going through Friday's lows. This is technically a negative price action."

The euro was up 0.19% at $1.0478 after reaching a one-month high of $1.0528.

Data on Monday showed business morale in Germany unexpectedly stagnated in February, as the Ifo institute said its business climate index remained flat at 85.2 in February after revising the January reading up slightly to the same figure.

Concerns have started to emerge about U.S. economic growth, and worries are growing as tariff deadlines by Trump on Canada and Mexico are set for next week. Investors also fear the labor market impact from actions taken by billionaire Elon Musk's Department of Government Efficiency.

Investors will get a reading on U.S. inflation on Friday, while a slew of Federal Reserve officials are expected to speak this week, beginning on Tuesday.

Against the Japanese yen, the dollar gained 0.31% at 149.76.

Sterling edged up 0.04% to $1.2634, losing ground after hitting a two-month high of $1.269.

British Prime Minister Keir Starmer is to visit Trump later in the week as he and Macron try to persuade Trump to not reach a hasty ceasefire deal with Russian President Vladimir Putin at any cost, but keep Europe involved and discuss military guarantees to Ukraine.

(Reporting by Chuck Mikolajczak; Editing by Nick Zieminski and Richard Chang)