FOREX-Euro under pressure on German coalition concerns
* Euro fails to hold early gains after German election
* Merkel wins but must find coalition partner
* Euro zone PMIs improve, but German factory PMI dips
* Aussie rises as China manufacturing growth picks up
By Gertrude Chavez-Dreyfuss
NEW YORK, Sept 23 (Reuters) - The euro weakened against most currencies on Monday, hurt by worries about how long it will take Angela Merkel to form a coalition after her party's victory in Sunday's German election.
Merkel's conservatives fell short of the votes needed to rule on their own and may have to convince leftist rivals to join them in government.
The German chancellor's victory came at the expense of the Free Democrat Party, a coalition partner of Merkel's last government, which failed to get the minimum 5 percent vote to qualify as a recognized party. The FDP cannot therefore be considered for a coalition.
"The uncertainty surrounding what a coalition might look like and the road to get to one has left the euro softer," said David Starkey, FX market analyst, at Cambridge Mercantile Corp in London.
In early New York trading, the euro was down slightly at $1.3507, staying below chart resistance at last week's 7-1/2 month high of $1.3569. It fell 0.6 percent against the yen to 133.51 yen.
Data showing above-forecast euro zone private sector business activity this month gave the single currency only a slight lift. German manufacturing activity growth unexpectedly slowed, according to Markit purchasing managers' index (PMI) data
The euro has gained more than 3 percent against the dollar since hitting a low close to $1.31 on Sept. 6, and analysts said it could struggle to extend gains unless data consistently points to an improving euro zone economy.
"The euro has not rallied on the passing of the German election risk, likely because with this risk behind us, it opens up the opportunity for some of the more pressing and difficult challenges facing Europe to be discussed," said Camilla Sutton, chief currency strategist at ScotiaBank in Toronto.
Tuesday's German Ifo sentiment data was likely to be closely watched, as well as testimony from European Central Bank President Mario Draghi later on Monday.
The dollar, meanwhile, was flat against a basket of currencies at 80.394, above a seven-month low of 80.060 set last week after the Federal Reserve surprised markets by keeping the pace of its bond-buying stimulus unchanged.
Comments by a top Federal Reserve official on Friday suggesting the central bank may scale back stimulus next month lent some support to the dollar.
Analysts at UBS, however, said it "seems unlikely" the Fed would choose to act so soon after an unchanged policy decision.
They said last week's Fed decision would keep the dollar weak for one quarter before its longer-term uptrend resumed and revised up their one- and three-month forecasts for euro/dollar to $1.37 and $1.35, from $1.30 and $1.28 previously.
Other Fed officials including Dennis Lockhart, William Dudley and Richard Fisher were due to speak later on Monday.
The growth-linked Australian dollar was up 0.4 percent at US$0.9427, after data showing China's factory sector growth accelerated in September.
The dollar fell 0.5 percent to 98.80 yen, with traders saying it faced strong chart resistance before 100 yen.
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