The euro looks likely to fall victim to Germany's political uncertainty, with a drop to seven-week lows on Monday heralding risks that the currency could revisit its lowest point of the year.
Europe's common currency plunged more than one per cent to $1.21 after Chancellor Gerhard Schroeder's Social Democrats and the opposition conservatives (CDU/CSU) led by Angela Merkel came out almost level in elections on Sunday.
Markets had hoped Ms Merkel, who plans reforms to Europe's largest economy, would win conclusively.
The prospect of political uncertainty and a coalition government with a watered-down reform programme is unnerving markets, and analysts see further euro losses to come.
"This is the worst outcome possible for the euro. Not only is there no clear winner, it will be difficult for either side to form a coalition and there seems to be hostility to the idea of a grand coalition. It looks as if it could drag on for weeks if not months and that uncertainty is the worst thing for markets," said Ian Stannard, currency strategist at BNP Paribas.
"I see euro/dollar testing the $1.1870 low in the next couple of weeks as there is no easy solution to this."
The euro hit the year's low point around $1.1870 in July, a 14 per cent drop from record highs close to $1.37 set at the end of last year.
Analysts at Deutsche Bank point to no votes on the European Constitution in French and Dutch referendums earlier this year as a sign that political setbacks can hurt the euro, even when the results are not particularly surprising.
"The example from the early days of June emphasises how seemingly anticipated events still have the potential to unlock euro selling, as political uncertainty becomes a reality and is projected forward," said Trevor Dinmore, currency analyst at Deutsche Bank, in a client note.
The euro dropped around three per cent against the dollar in the 10 days prior to the referendums, Deutsche Bank research shows, and a further four per cent or more in the 20 days afterwards.
Uncertainty is likely to continue for weeks following the German election. While a "grand coalition" of the CDU/CSU and the SPD appears the most likely possibility, Mr Schroeder has vowed his party will never enter a coalition government led by Merkel, and refused to concede defeat.
In theory there is no limit on how much time parties can take to form a ruling coalition. But they will aim to complete talks within four weeks and before the first session of the new parliament, which must take place by October 18.
Analysts said there was also a danger that institutional investors would pull out of German stocks, putting downward pressure on the euro.
In recent months the DAX index has led the way among global equity markets - powering to multi-year highs even as the German election approached - as investors turned optimistic on the outlook for global growth, to which export-oriented German firms are particularly geared.
The DAX lost as much as two per cent on Monday, before halving that loss to remain within recent ranges.
"The DAX has outperformed since the election was called in May," said Steven Pearson, chief currency strategist at HBOS.
"We are not seeing a huge impact on the DAX ahead of the Fed's decision tomorrow, but foreign investors had bought into the idea of reform and the risk is that they will unwind their overweight positions, which would be negative for the euro."