The euro firmed on Monday after Germany's opposition conservatives won the national election as expected, while the dollar extended its decline on mounting worries over the growth outlook of the U.S. economy.

Friedrich Merz was set to become Germany's next chancellor after his party emerged victorious in Sunday's election, though he faces complex and lengthy coalition negotiations after the far-right Alternative for Germany (AfD) surged to a historic second place in a fractured vote.

The euro extended gains from early in the session to last trade 0.46% higher at $1.0508. Investors' focus is now on how quickly Merz's party can form a coalition government to bring about much-needed change to a frail economy.

"The fragmentation of Germany's political landscape will make the upcoming coalition negotiations very complicated," said Carsten Brzeski, global head of macro for ING Research.

"The risk is high that after tonight, the longing for a significant overhaul of the German economy will last much longer. It is hard to see that the next government will be able to deliver much more for the economy than a short-lived positive impact from some tax cuts, small reforms and a bit more investment."
In the broader market, the dollar fell ahead of a busy week packed with U.S. economic data and speeches from various Federal Reserve officials.

Trading was thin on Monday with Japanese markets closed for a public holiday.

Against the dollar, sterling hovered near a two-month high at $1.2659, while the Aussie rose 0.17% to $0.6370.
The New Zealand dollar similarly gained 0.16% to $0.5751. The dollar index fell 0.2% to 106.34.

The greenback has slid more than 3% from its January peak as traders reasoned the start of Donald Trump's second term has been mostly bluster on tariffs, leaving little appetite for them to load up on fresh dollar holdings.

Also adding to headwinds for the dollar were falling U.S. Treasury yields on heightened bets of more Fed cuts this year, amid growing concerns over the outlook for the world's largest economy.

Data on Friday showed U.S. business activity nearly stalled in February - the latest in a string of surveys to suggest that businesses and consumers were becoming increasingly rattled by the Trump administration's policies.

Later this week, investors will get the second estimate of fourth quarter growth figures in the U.S. and January's core PCE price index data.

"It's a week where the market could feasibly respond to any economic data point," said Chris Weston, head of research at Pepperstone.

"With U.S. growth concerns building traction, the market's reaction function is now heavily skewed to any downside in the data outcomes."

The drop in Treasury yields, particularly in real terms, has weighed on the dollar against the yen as Japanese yields rise on speculation of another rate hike from the Bank of Japan.

The yen rose to its strongest level in more than two months on Monday at 148.85 per dollar.

Source: Investing.com