The euro enjoyed a brief rally on reports that the political stalemate in Germany is over, but the early gains were shed as investors scaled back their hopes of any meaningful economic reforms in the single currency's largest economy. The market doubted that the so-called "grand coalition" between the Christian Democrats and the Social Democrats will be able to implement substantive reforms to help lift economic growth, even though the SPD's Gerhard Schroeder has agreed to step down after seven years in power, allowing Angela Merkel of the CDU to become Germany's first female chancellor. "The reality is that it will be very difficult to implement a lot of the reforms," said Neil Mackinnon, chief economist at ECU Group. The question of what the new government would be has dogged the euro since the tight Sept 18 election, which led to both Schroeder and Merkel laying claim to the post. The German backdrop was one of the reasons why the euro plunged to a near three-month low against the dollar as markets diminished expectations of deep-seated economic reforms. Other influences on the markets this week will only emerge tomorrow with public holidays in both the US and Japan. 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. However, tomorrow's US trade numbers will have to be overcome first. "Key to overall dollar direction this week will be the extent to which cyclical support overwhelms structural negatives," said HBOS currency strategist Steve Pearson. On the structural side, the market is worried that the US will post a record US trade deficit of over 60 bln usd in August as energy costs rise. On the cyclical side, the market thinks the news will be strong enough to keep the US Federal Reserve on course to raise the cost of borrowing again at its next rate-setting meeting on Nov 1. Last 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 may well enjoy some respite this week, especially if tomorrow's trade data continues to show an improving trend and Wednesday's earnings news shows pay pressures mounting. "The market may well have to rethink its position on the Bank of England," said ECU Group's Mackinnon. Sterling has suffered heavily recently from the perception that UK monetary policy is set to diverge markedly from that in the US and the euro zone. HBOS' Pearson said today's larger than expected increase in UK core output prices in September may well support caution on the BoE's rate-setting Monetary Policy Committee. The market remains fairly split on the prospect of another quarter point rate cut from the BoE next month, which would take the key repo rate down to 4.25 pct.