FX round-up: Elections weigh on euro, kiwi until North Korea's late words
Elections in Germany and New Zealand over the weekend and an announcement of a snap vote in Japan were the dominant themes at the start of the week, until some incendiary comments from North Korea's foreign minister later in the day.
The Japanese yen, an instinctive safe haven for currency traders, spiked after North Korea's foreign minister Ri Yong-ho accused the US of declaring war.
Saying that US President Donald Trump's comments over the weekend were "clearly a declaration of war", Ri told reporters in New York that North Korea reserved the right to shoot down US bombers and that all options would be on the table for Pyongyang.
Earlier the Japanese yen was down on all major crosses after Prime Minister Shinzo Abe called an early election, citing the need for a new mandate in order to deal with the crisis on the Korean peninsula and for constitutional reform to strengthen the country's military.
Although voter support for Abe had fallen below 30% two months ago, a weekend poll showed Abe had the backing of 44% of voters, with other recent polls handing him over 50%, on the back of his firm handling of recent rising tensions with North Korea.
After Abe said he would dissolve the lower house of parliament, local media reported an election would be held on 22 October.
Abe also said he was seeking a mandate to funnel the revenues from the sales tax increase scheduled for October 2019 into increased spending on social security and education, instead of debt reduction.
Earlier, when concerns had been more docile, the German election result was seen as a "disappointing win" for Chancellor Angela Merkel as her grand coalition fell apart and she now faces weeks of negotiations to try and form a 'Jamaica' coalition with the yellow-badged liberal FDP and the Greens.
A victory for Merkel's CDU/CSU alliance was spoiled by the rise of the AfD party, which took 13% of the vote as the far-right entered parliament for the first time since World War II.
"Though the presence of the AfD should not significantly impact German intentions regarding the EU in the immediate future, the rising populism dampened the mood in the euro markets," said analyst Ipek Ozkardeskaya at London Capital Group, who looked ahead to 1 October's Catalan referendum as the next challenge on the European political agenda.
Also acting on the euro were comments from European Central Bank President Mario Draghi, who said the eurozone still needs a large amount of stimulus, but he is confident the inflation rate will pick up.
The single currency was down 0.69% on the dollar to 1.1868, and almost as much against the pound at 0.8820, only up against the kiwi.
The NZ dollar was the worst G10 performer against the US dollar in early trade, after New Zealand’s ruling National party failed to gain majority at Saturday’s election.
But as the Labour party won an even smaller share of the vote, talks will need to be held with independent Winston Peters to form a coalition, which uncertainty will curb appetite for the kiwi.
The pound was up against the dollar and euro in early trade but fell against the greenback to stand at 1.3492 by late afternoon.
Analyst Jasper Lawler at LCG cited higher than usual UK political risk this week from the party conferences.
"Of some note, Shadow Chancellor John McDonnell has said Labour would nationalise construction. Jeremey Corbyn will address the Labour party conference on Wednesday while Theresa May is set to apologise for the election at the Tory conference on Saturday," he said.