German elections weigh on euro

London - The euro weakened on Monday after German Chancellor Angela Merkel's conservatives were routed in elections in a key state, while world shares eased back from their recent rally.

Concerns also lingered about reports of soaring radiation levels at a damaged nuclear plant in Japan, and about the impact of the fighting in oil-producer Libya.

Merkel's conservatives lost power in regional stronghold Baden-Wuerttemberg on Sunday, with early poll results showing the Greens, buoyed by Japan's nuclear crisis, surging to their first state premiership.

Barclays Capital said in a note that the result meant Merkel, the leader of Europe's largest economy, would be more reliant on support from opposition parties and that it could feed uncertainty about political support for a euro zone bailout package.

The euro eased against the dollar as a result, to $1.4060 but the dollar was also aided by hawkish comments from some Federal Reserve officials.

"It is a combination of setbacks to German Chancellor Angela Merkel's party and the US dollar being lifted by those comments from the Fed officials which led some investors to short the euro," said Adam Myers, senior currency strategist at Credit Agricole.

St Louis Federal Reserve President James Bullard said on Saturday that lengthening the "extended period" of low interest rates could encourage a liquidity trap.

It followed comments on Friday from Philadelphia Federal Reserve Bank President Charles Plosser, who said the Fed would have to reverse its easy money policy in the "not-too-distant future" to avoid sowing the seeds of inflation.