By Wayne Cole and Hideyuki Sano
SYDNEY/TOKYO (Reuters) - The euro slipped in early Asian trading on Monday after Germany's election showed surging support for a far-right party that left Chancellor Angela Merkel scrambling to form a governing coalition.
The euro fell as much as 0.5 percent to $1.1896 and last stood at $1.1933, down 0.2 percent, holding above support around $1.1860.
Merkel did win a fourth term in office on Sunday but will have to build an uneasy coalition to form a government after her conservatives haemorrhaged support in the face of a surge by the anti-immigration Alternative for Germany (AfD).
Despite winning the most votes, Merkel's bloc slumped to its worst result since 1949 and her current Social Democrat coalition partners said they would go into opposition after tumbling to 20.7 percent in projections, a post-war low.
"Probably the most significant announcement following the election was that the current junior coalition partner, SPD, immediately announced it would go into opposition," said Peter Schaffrik, global macro strategist at RBC Europe in London.
"With the withdrawal (from a grand coalition) by the SPD, we think the only realistic option left is a coalition of Merkel's CDU/CSU, the Free Democrats (FDP) and the Greens - dubbed 'Jamaica coalition - due to the colours of the three blocks (black/yellow/green)," he said.
But building such a coalition could take months as the three-way tie-up has not been tested at national level.
Political uncertainty also took a toll on the New Zealand dollar after no single party won a majority in an election over the weekend.
The New Zealand currency dropped 0.9 percent to $0.7269.
The ruling National Party won the largest number votes in the election, but neither of the major parties won enough seats to gain a majority in parliament, forcing a round of coalition building that could last days or weeks.
Sterling steadied at $1.3486 after falling on Friday when ratings agency Moody's downgraded Britain's credit rating, saying government plans to bring down debt had been knocked off course and Brexit would weigh on the economy.
A few hours after Prime Minister Theresa May set out plans for new ties with the European Union, Moody's cut the rating to Aa2, underscoring the economic risks that leaving the bloc poses for the world's fifth-biggest economy.
May failed to give any concrete details for how Britain might retain preferential access to Europe's single market in her speech.
The yen weakened 0.3 percent to 112.30 yen per dollar, helped by renewed hope of Prime Minister Shinzo Abe's economic stimulus as he is expected to announce a snap election, to be held on October 22.
A weekend survey by the Nikkei business daily showed 44 percent of voters planned to vote for Abe's Liberal Democratic Party (LDP) versus 8 percent for the main opposition Democratic Party.
"It's easier for traders to start the week by selling the yen given expected resolution of the parliament and so on. But I would suspect a lot of election related stuff is already priced in and the yen would have limited downside," said Kyosuke Suzuki, director of foreign exchange at Societe Generale (PA:SOGN) in Tokyo.
Concerns over simmering tensions between North Korea and the United States could resurface any time, likely lifting the yen.
Japan is the world’s largest creditor nation and traders tend to assume Japanese investors would repatriate funds at times of crisis, thus benefiting the yen.
North Korea said on Saturday targeting the U.S. mainland with its rockets was inevitable after "Mr. Evil President" Donald Trump called Pyongyang's leader "rocket man", further escalating rhetoric over the North's nuclear weapons and missile programs.