Euro drops against U.S. dollar as German election race tightens

The euro dropped against the U.S. dollar on Monday as Germany - Europe's largest economy - entered the last week before a national election.

The euro fell to US$1.2315 in morning European trading, down more than a cent from US$1.2420 at the end of the day Friday in New York.

The British pound fell to US$1.8258 from US$1.8392 on Friday, and the dollar gained slightly against the Japanese yen after a landslide victory by the Japan's ruling party in weekend elections gave Prime Minister Junichiro Koizumi a mandate to push through economic reforms.

The elections gave Koizumi's Liberal Democratic Party and its coalition partner New Komeito Party a two-thirds majority in the lower house, allowing the ruling coalition to overrule defeats of bills in the upper house.

Meanwhile, traders were looking ahead to Germany's election on Sunday. Until recently it had seemed a certainty that Angela Merkel's conservative Christian Democrats and their preferred coalition party, the pro-business Free Democrats, would win a majority.

Markets were also continuing to watch the fallout from Hurricane Katrina, with the possibility that the U.S. twin budget and trade deficits could come back to haunt the dollar, the AP reports.