Euro rallies as Germany's historic debt overhaul boosts growth outlook

The euro extended its rally on Wednesday and hovered near four-month highs as Germany's proposed 500 billion euro ($531 billion) infrastructure fund boosted Europe's growth prospects despite global trade tensions worrying investors.

The single currency is up nearly 3 per cent this week, already on track for its best week since November 2022, taking another leg higher after a late Tuesday announcement from the parties hoping to form Germany's next government of the planned new fund and an overhaul of borrowing rules.

It rose 0.52 per cent against the dollar on Wednesday to $1.0682 and firmed against other currencies, too, including the British pound, the Japanese yen and the Swiss franc,

 

"The big shift that we've seen in German fiscal policy is providing a significant kind of tailwind for the euro to strengthen further in the short term," said Lee Hardman, senior currency analyst at MUFG.

"Certainly the market is pricing in now ... a more positive outlook for Europe's economy going forward with the fiscal stimulus likely to provide more support for growth in the coming years," he added.

Hardman, however, cautioned about the downside risks from US President Donald Trump's tariff threats, saying early April will be a key "crunch point" for Europe's economy.

Germany's bond yields surged as investors digested the additional borrowing expected to back the debt overhaul, with 30-year yields jumping as much as 25 basis points at one point. Short term yields also rose, boosting the euro against the dollar.

Also in the mix, the ECB is expected to cut interest rates on Thursday, with more to follow as it tries to prop up weak economic growth.

If fiscal stimulus by Europe's biggest economy supports growth, it would reduce pressure on the ECB to cut rates more aggressively and is a "positive shock" for the euro, Hardman added.

Other European currencies also rallied against the dollar, with sterling at a near four-month high of $1.2853, up 0.19 per cent on the day. The Swiss franc was at 0.8885 per dollar, its strongest since mid-December.

Sweden's crown, sensitive to European equities, particularly defence stocks, continued its recent rally, and was at its strongest on the dollar in five months. The dollar was down 1.2 per cent at 10.3 crowns, and the euro was 0.4 per cent lower at 11.01 crowns.

Tariffs

It was not just European developments that were boosting the euro, pound and franc against the dollar, however, as signs of slowing economic growth in the United States, partly as a result of uncertainty about tariffs, hurt the US currency.

The dollar index, which measures the US currency against six peers, hit its lowest since November 8 at 104.85. The dollar was also down 0.2 per cent on the Japanese yen at 149.43, just above Tuesday's five-month low.

On Tuesday, Trump vowed again reciprocal tariffs from April in his first speech to Congress since taking office.

His 25 per cent tariffs on imports from Mexico and Canada took effect on Tuesday, along with a doubling of duties on Chinese goods to 20 per cent, and Canada and China quickly acted in kind, while Mexican President Claudia Sheinbaum vowed retaliation but did not provide details.

Currency traders are still struggling to assess whether the tariffs will be permanent or if they are negotiable. The Canadian dollar steadied to C$1.4394 to the dollar, well off the C$1.479 to which it weakened a month ago when tariffs were first mooted.

In Asia, China pledged more fiscal stimulus on Wednesday, signalling greater efforts to boost consumption to protect economic growth amid heightened trade tensions with the United States. Policymakers set this year's GDP growth goal at roughly 5 per cent, as expected.

The offshore yuan edged up 0.14 per cent to 7.2639 per dollar.

The China-sensitive Aussie, traded 0.21 per cent higher at $0.6285, also boosted by upbeat domestic data.