The euro eased against the dollar on Monday, giving up earlier gains as investors questioned the reform drive of the new German government due to be formed by conservative leader Angela Merkel.
Initially the euro gained after news that Merkel will become Germany's chancellor under a deal struck with Chancellor Gerhard Schroeder's Social Democrats. The move was seen as ending three weeks of political deadlock since inconclusive polls last month.
But the currency lost some ground when senior political sources told Reuters that Schroeder's SPD party was poised to take the foreign, finance, justice and labour ministries in the new grand coalition with Merkel's Christian Democrats (CDU).
"The market did go up a little on the news but now we're coming back down again because I think the good news is factored in," Rabobank senior proprietary trader Lee Ferridge said.
"Yes, they've reached an agreement, but it remains to be seen whether the grand coalition can work and whether it actually delivers the reforms."
By 1141 GMT the euro was down 0.10 percent on the day at $1.2108 - having been up almost a quarter percent earlier at around $1.2150.
Against the Japanese currency it was up 0.07 percent at 138.03 yen.
"I don't think (the grand coalition) is going to prove that positive for the euro over the short, medium or longer run," HBOS Treasury Services chief currency strategist Steven Pearson said.
"What you are likely to see is that things open with much fanfare and promises to work together..., but ultimately nothing will get done and we'll sort of drift on sideways in terms of economic performance in the euro zone."
Dollar gains, registered after last week's US jobs report, were capped by the view that interest rate rises in Europe and Asia would eventually diminish its yield advantage.
Last week European Central Bank President Jean-Claude Trichet issued a stern message that the bank was ready to raise rates when needed to keep inflation in check.
Earlier on Monday, Trichet said national governments in Europe must step up efforts to reform their economies or face slower growth in future.