By Gertrude Chavez-Dreyfuss
NEW YORK (Reuters) -The euro hit four month highs on Wednesday against the U.S. dollar, as Europe’s growth prospects improved after Germany’s proposed 500-billion euro ($531 billion) infrastructure fund, potentially offsetting global trade tensions.
The single currency is up nearly 3.7% 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 to its highest since November 8 against the dollar was last up 1.3% at $1.0765. The euro also gained against other currencies, including the British pound, the Japanese yen and the Swiss franc,.
“By launching a 500-billion euro investment fund and working to reform the country’s overly-restrictive debt brake, German leaders are taking steps that could reinvigorate growth at the core of the euro project, help reverse a long decline in underlying economic infrastructure, and establish a strong bulwark against Russia’s westward expansion” said Karl Schamotta, chief market strategist, at Corpay in Toronto.
“Traders are reacting with unbridled optimism, bidding the euro up against all of its major counterparts.”
The dollar index, the reverse proxy for the euro being the largest component of the index, fell more than 1% at 104.45 and hit its lowest since November 8 as well.
Lee Hardman, senior currency analyst at MUFG, cautioned however about the downside risks for the euro from U.S. 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 rallying to a four-month peak of $1.2871 and last traded up 0.5% at $1.2862. Against the Swiss franc, the dollar was slightly higher on the day at 0.8899 franc .
Sweden’s crown, sensitive to European equities, particularly defense stocks, continued its recent rally, and was at its strongest on the dollar in five months. The dollar was last down 1.4% at 10.267 crowns, and the euro was 0.3% lower at 11.03 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 U.S. currency.
The dollar fell 0.7% against the yen to 148.74
On Tuesday, Trump vowed again reciprocal tariffs from April in his first speech to Congress since taking office.
His 25% tariffs on imports from Mexico and Canada took effect on Tuesday, along with a doubling of duties on Chinese goods to 20%, 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.
U.S. economic data on Wednesday was mixed, with private payrolls slowing sharply last month, while the service sector expanding as price growth accelerated.
Private payrolls increased by only 77,000 jobs last month after an upwardly revised 186,000 gain in January. Economists polled by Reuters had forecast private employment rising 140,000 following a previously reported 183,000 advance in January.
U.S. services sector growth, meanwhile, unexpectedly picked up in February and prices for inputs increased. The Institute for Supply Management’s (ISM) non-manufacturing purchasing managers index (PMI) climbed to 53.5 last month from 52.8 in January. Economists polled by Reuters had forecast the services PMI dipping to 52.6.
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%, as expected.
The offshore yuan edged up 0.2% to 7.2639 per dollar.
The China-sensitive Aussie, traded 0.6% higher at US$0.6307, also boosted by upbeat domestic data.
(Reporting by Gertrude Chavez-Dreyfuss; Additional reporting by Yadarisa Shabong in Bengalaru, Rae Wee and Ankur Banerjee in Singapore, and Alun John in London; Editing by Emelia Sithole-Matarise and Nick Zieminski)
