The euro edged higher on reports that the political stalemate in Germany, the single currency zone's largest economy, is over after the Christian Democrats and Social Democrats finally hammered out a deal. German public broadcaster ZDF said the Social Democrats' Gerhard Schroeder had agreed to step down after seven years in power, allowing Angela Merkel of the Christian Democrats to become Germany's first female chancellor. She looks likely to lead a grand left-right coalition government last seen in the 1960s in which the Social Democrats will hold key ministeries. Its key task will be to revive the battered economy, crippled by growth and unemployment currently running at more than 11 pct. The question of who would lead a new government has dogged talks between the main parties since they began in the wake of the tight Sept 18 election, which led to both Schroeder and Merkel laying claim to the post. "A possible solution of the German government stalemate could support the euro on the margin," said Michael Klawitter, currency strategist at WestLB. The euro had been hit hard after the German election, plunging to a seven-week low against the dollar as markets diminished expectations of deep-seated economic reforms. Even though the CDU and the SPD have reportedly agreed to form a 'grand coalition', analysts still doubt that there will be substantial reforms. Elsewhere, the dollar's advance in the wake of last week's solid US jobs report for September faltered somewhat this morning as market activity was stemmed by public holidays in both the US and Japan. Nevertheless, analysts said the dollar, which has risen over 10 pct against the euro this year, could be buoyed further this week by US inflation and retail sales data. Both are set to be strong and further cement expectations that the US Federal Reserve will continue raising interest rates in the coming months. On Friday, the dollar was boosted by news that US payrolls fell by only 35,000 in September when some sections of the market had been predicting falls in the 150,000 region. The Fed raised its key Fed funds rate a quarter point for the 11th consecutive time last month to 3.75 pct, and indicated that the US economy is on a steady growth track despite the impact of Hurricane Katrina. Further upbeat commentary from Federal Reserve officials earlier has helped the dollar rise further. This week's minutes of the last rate-setting meeting will be closely monitored to see if Mark Olson, one of the policymakers, voted against a rate hike again. Elsewhere, analysts said the pound is likely to remain steady against the euro as interest rate markets await more weighty consumption data than that on offer this week. "Sterling weakness is also likely to take a pause and a more range bound development is expected for euro/sterling," said WestLB's Klawitter.