July 2, 2018 / 2:02 AM / 10 months ago

FOREX-Euro slips as German coalition crisis deepens, Mexican peso gains

(Adds Mexican peso reaction to exit polls and dollar/yen at new high, updates levels throughout)

* Euro whipsawed by German coalition crisis as CSU head quits

* Dollar hits fresh 6-week high, supported by Fed policy outlook

* Mexican peso gains as exit polls show AMLO on track to win

* Yuan little changed after weekend China factory data

By Hideyuki Sano and Tomo Uetake

TOKYO, July 2 (Reuters) - The euro slipped back in early Monday trade after German Chancellor Angela Merkel was dealt a fresh blow when her interior minister offered to quit in an escalating row over migration policy.

Interior Minister Horst Seehofer, who has called for tougher border controls, said he was ready to step down as minister and as chair of his Christian Social Union (CSU), junior coalition partner in Merkel’s government.

While the euro initially rose to as high as $1.1698 in a knee-jerk reaction to the news, it quickly lost steam as Seehofer’s departure would be seen as making Merkel’s future even more uncertain.

The common currency last stood traded at $1.1657, down 0.28 percent from late U.S. trade on Friday. Against the safe-haven Swiss franc, it fell 0.1 percent to 1.1560 franc .

The euro had gained on Friday after European Union leaders hammered out an agreement on migration that investors hoped would eased pressure on Merkel.

The dollar extended its gains against the yen to hit a fresh six-week high of 111.04 yen.

The Japanese currency was unmoved by the Bank of Japan’s tankan business sentiment survey, which showed a slight dip in big Japanese manufacturers’ sentiment.

The dollar has been supported by the relative strength of the U.S. economy and the prospects of further rate hikes from the Federal Reserve.

Data on Friday showed so-called core personal consumption expenditures (PCE) price index, the Fed’s preferred gauge of U.S. inflation, rose 2.0 percent from a year earlier, the biggest gain since April 2012.

That kept alive expectations that the Fed will raise rates at least once and possibly twice by the end of year.

Yet investors are also becoming wary of possible disruptions from the trade disputes triggered by U.S. President Donald Trump’s protectionist “America First” policy.

Canada struck back on Friday at the Trump administration over U.S. steel and aluminium tariffs, imposing punitive measures on C$16.6 billion ($12.63 billion) worth of American goods, effective from Sunday.

The United States has also threatened to impose duties on up to $450 billion of Chinese imports, with the first $34 billion portion set to go into effect on July 6.

While economists expect the direct economic damage from those tariffs to be relatively contained, at least for now, many see the reversal of globalisation could have negative repercussions for many years to come, lowering companies’ longer-term growth expectations.

Fears of a trade war have already knocked Chinese shares to two-year lows, and buffeted the yuan last week.

The yuan, which posted its biggest monthly fall on record last month, was little changed at 6.6435 per dollar in the offshore trade, off Friday’s seven-month low of 6.6522 to the dollar.

“The Chinese authorities do not seem to have tried to stem the yuan’s fall, which many people take as a message from Beijing that that’s one thing they could do against U.S. pressure on trade,” said Bart Wakabayashi, Tokyo branch manager of State Street Bank.

The official survey on China’s manufacturing sector published on Saturday suggested growth in the sector slowed slightly in June after a better-than-expected performance in May.

Elsewhere, the Mexican peso gained 1.1 percent in choppy early Asian trade on Monday as exit polls showed Mexicans voted overwhelmingly for anti-establishment outsider Andres Manuel Lopez Obrador in Sunday’s presidential election.

Lopez Obrador, former Mexico City mayor and anti-establishment leftist is expected to sweep into power on voters’ anger at rampant violence and corruption in the country.

With his victory seen as a certainty, investors are looking to the results of Congressional elections, where National Regeneration Movement (MORENA), a party that has only existed formally since 2014, could be close to a majority.

The peso last traded at 19.7000 to the dollar, edging near one-month high of 19.5615 touched on Friday. (Reporting by Hideyuki Sano and Tomo Uetake; Editing by Simon Cameron-Moore)

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