(Bloomberg) -- The euro reversed early losses as investors saw the failure of German Chancellor Angela Merkel’s coalition talks as most likely paving the way to a minority government, rather than fresh elections.
The common currency snapped earlier declines seen during the Asian session on Monday, after the pro-business Free Democrats, which earlier walked out on talks, told the German newspaper Bild that it would support a minority government. That makes the possibility of a Christian Democratic-led bloc more likely, and assuages pressure on Merkel.
Before the latest setback, investors had remained confident that Merkel would be able to seal a deal before the end of a self-imposed deadline. She can either now pursue a minority-led government or request new elections from President Frank-Walter Steinmeier -- both of which are unprecedented in the federal republic’s 68-year history. Still, the market impact may be muted as the developments are unlikely to harm growth or inflation in the euro area.
A minority government is “probably the path of least resistance at this point,” said Ned Rumpeltin, European head of currency strategy at Toronto-Dominion Bank in London. “While this creates some near-term uncertainty, we downplay the risks that this will turn into anything more than a minor bump in the road.”
The euro rose 0.1 percent to $1.1800 as of 9:36 a.m. in London, after dropping as much as 0.6 percent, the most in three weeks. German 10-year government bond yields were steady at 0.36 percent after opening down one basis point.
(Adds report on possible minority government.)