Euro Slides, Dollar Rises After Elections in Germany, New Zealand

The euro slid while the U.S. dollar rose Monday after elections in Germany and New Zealand set the stage for periods of political uncertainty in both countries.

Chancellor Angela Merkel's conservative alliance won Sunday's German election, essentially guaranteeing her a fourth term as chancellor, though a strong showing for the nationalist Alternative for Germany party suggests Europe's largest economy could face political turbulence. The AfD party is anti-immigrant and wants to weaken European integration.

"The waning support for Merkel's coalition partner...combined with the rise in popularity of the far-right Alternative for Germany means that the process of building a coalition could take months and that the resulting agreement will be a much weaker government in the eurozone's largest economy," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange.

The euro fell 0.9% to $1.1847, though it remains up about 13% for the year.

New Zealand's general election Sunday failed to deliver a clear result. Party leaders now have to forge alliances to achieve a ruling coalition, which could result in a either another term for the current center-right government, or a win for the center-left Labour Party. The New Zealand dollar dropped 1% against the U.S. dollar to the $0.7262.

"There is a sense that we are entering a period of political uncertainty and that is never a good thing, at least for the currencies of the countries involved," said Ray Attrill, head of foreign-exchange strategy at National Australia Bank.

Others noted, however, that market moves sparked by recent political and other surprises have been short-lived.

"Given the relatively muted reaction to the many big recent shocks, we don't expect much in the way of volatility as a result of this," Paul Hatfield, global chief investment officer at Alcentra, which is part of BNY Mellon Investment Management, wrote in a note.

The WSJ Dollar Index, which measures the dollar against 16 other currencies, rose 0.3% to 85.82.

The dollar has strengthened in recent days as investors grow more optimistic on the prospect for U.S. interest-rate increases. Last week, the Federal Reserve signaled it still expects to raise rates again this year and three times next year despite weakness in inflation.

Investors are now pricing in a 68% chance that the Fed raises rates again this year, up from 58% a week ago, according to CME Group data. Expectations that U.S. rates will rise help support the dollar by making U.S. assets more attractive to yield-seeking investors.

In other Monday trading, the Japanese yen and Swiss franc rose as tensions between North Korea and the U.S. were reignited. North Korea's foreign minister said Monday the U.S. had declared war on North Korea and his country considered all possible responses to be on the table. Later, a U.S. State Department spokesman said the U.S. hasn't declared war on North Korea.

The dollar was down 0.3% against the Japanese and Swiss currencies, which investors often buy amid political uncertainty.

--Chelsey Dulaney contributed to this article.

Write to Saumya Vaishampayan at saumya.vaishampayan@wsj.com and Kenan Machado at kenan.machado@wsj.com

(END) Dow Jones Newswires

September 25, 2017 17:40 ET (21:40 GMT)