By Saikat Chatterjee
LONDON (Reuters) - The euro steadied on Tuesday after registering its biggest daily fall in the previous session as investors looked beyond Germany's political impasse to focus on the euro zone's still robust economy.
With major currencies closeted in tight trading ranges in a lackluster session in a holiday-shortened week, traders were wary of taking big bets.
"The worst case scenario is that the German political process will take a little more time to resolve but markets are not expecting anything extraordinary to come out of this and the bigger picture is that the economy is performing well," said Commerzbank (DE:CBKG) currency strategist Esther Reichelt in Frankfurt.
Germany's Chancellor Angela Merkel raised the prospect on Monday of a new election after talks on forming a three-way coalition collapsed.
But two of her veteran allies urged parties on Tuesday to make compromises and form a stable government.
The single currency
With growth from the bloc exceeding the United States in the third quarter, led by largest economy Germany, the single currency has recovered from earlier lows and investors were becoming more comfortable in holding European assets.
TD strategists said a snap election would not necessarily be a negative for the euro in the medium term and they continued to believe that the growth dynamics should outweigh any flare-up in political uncertainty.
Derivatives markets pointed to further upside for the euro with risk reversals still at elevated levels while implied volatility gauges held near 2017 lows.
Elsewhere, the dollar gave back some of its gains in Asian trading but stuck close to a one-week high against a basket of currencies .
The dollar index, which tracks the greenback against a basket of six major rivals, was broadly flat at 94.08 (DXY), but was still within sight of its overnight peak of 94.104, its highest since Nov. 14.
The U.S. data calendar is relatively sparse ahead of the Thanksgiving holiday, with Federal Reserve Chair Janet Yellen scheduled to give a speech later on Tuesday. Minutes from the Fed's November meeting will be released on Wednesday.