The euro slipped below $1.18 for the first time in over a month on Tuesday after its worst day this year, as investors worried that months of coalition talks in Germany could hit the economy and make closer euro zone integration difficult.
German Chancellor Angela Merkel, who won a fourth term in elections on Sunday but now faces a tough juggling act to form a government with other parties, on Monday struck a note of caution with respect to French calls for fiscal union. French President Emmanuel Macron, who wants a fundamental overhaul of the European Union's single currency zone and whose ideas include creating a euro zone budget and a euro zone finance minister, will lay out his plans in a speech in Paris at 1300 GMT.
But the results of Germany's election have forced Merkel to consider a new coalition including the liberal Free Democrats (FDP), a party critical of Macron's ideas on Europe, and investors are therefore worried the reforms that they would welcome will not end up going through. "The German election was a blow for Macron too frankly, not only Merkel," said Neil Jones, Mizuho's head of hedge fund FX sales in London.
The euro slipped half a percent to as low as $1.1786, its weakest since August 25, after falling around 0.9 percent on Monday - its heaviest one-day loss since December. Commerzbank currency strategist Thu Lan Nguyen, in Frankfurt, said hopes for greater euro zone integration had been the main cause of a more than 10 percent appreciation by the euro against the dollar since the first round of France's presidential election.
The euro faced additional pressure on Monday when European Central Bank President Mario Draghi singled out currency volatility as a source of uncertainty that required monitoring and argued that "ample" ECB accommodation was still needed. The dollar was flat at 111.80 yen, having earlier dipped against the Japanese currency as worries over North Korea flared up again amid an escalating war of words between it and the United States.
The yen made sharp gains versus the greenback on Monday after the North Korean foreign minister said President Donald Trump had declared war on the country and that Pyongyang reserved the right to take countermeasures, including shooting down US bombers even if not in its air space. The dollar index, which measures the greenback against a basket of six major currencies but is heavily skewed towards the euro, hit its highest in four weeks.
Immediate focus was on what views might be expressed by Fed Chair Janet Yellen, who is due to speak in Cleveland at 1645 GMT on "inflation, uncertainty, and monetary policy". New Zealand's dollar extended the previous day's slide and was down 0.6 percent at $0.7223, having sunk after the country's National Party won the largest number of votes in Saturday's election but not enough seats to govern outright.