Euro hits five-month high before German vote on massive spending surge
THE euro hit its highest levels in more than five months against the greenback on Tuesday (Mar 18), as the German parliament was set to vote on a massive surge in borrowing that could boost growth across the euro area’s largest economy and the wider region.
Meanwhile, the US dollar hit a two-week high against the yen as investors await the outcome of Wednesday’s policy meetings from the Federal Reserve and the Bank of Japan (BOJ).
The market will also be watching developments on a possible Russia-Ukraine peace deal, which would be positive for the single currency.
German investor morale improved more than expected in March, economic research institute ZEW said on Tuesday. It reported an increase in its economic sentiment index to 51.6 points, from 26 points in February.
A vote in the lower house of the German parliament is expected in the afternoon after a morning debate. Should the legislation pass the Bundestag lower house, it still has to go to the Bundesrat upper house. The main hurdle to passage fell on Monday, when the Bavarian Free Voters agreed to back the plans.
The euro was down 0.05 per cent at US$1.0916, after hitting US$1.0954 earlier in the session, its highest since Oct 10.
Bank of America sees the euro rising to 1.15 by the end of 2025.
“We see two main drivers for this outlook: policy uncertainty and fiscal tightening in the US while Germany is about to increase its spending massively,” said Athanasios Vamvakidis, global head of G10 forex strategy at Bank of America.
“The main near-term risk is the implementation of US tariffs on Apr 2. Extreme tariffs (at 25 per cent) would likely put downward pressure on the euro,” he added.
US President Donald Trump noted that he has no intention of creating exemptions on steel and aluminium tariffs, and said reciprocal and sectoral tariffs will be imposed on Apr 2.
“The prospect of wider deficits in Europe has had the effect of raising Europe’s sovereign yields this month and sucking flows into the euro and the British pound,” said Thierry Wizman, global forex and rates strategist at Macquarie.
“Fading of ‘American exceptionalism’ is at the core of our outlook for forex in the medium term,” he added.
The US dollar index, which measures the currency against six peers, was up 0.07 per cent at 103.48. It hit 103.21 last week, its lowest level since Oct 15.
It has dropped around 6 per cent from the more than two-year peak of 110.17 hit in mid-January.
Fears that President Trump’s aggressive tariff policies could trigger a broader economic slowdown have weakened the greenback amid a string of soggy sentiment surveys.
The US dollar was at 149.78 against the Japanese currency, after reaching 149.91, its highest level since Mar 5. It hit 146.52 last week, its lowest level since Oct 4.
Analysts expect the Fed to hold its monetary policy stance amid persistent inflation concerns.
New economic projections from Fed officials this week will provide the most tangible evidence yet of how US central bankers view the likely impact of Trump administration policies.
BOJ policymakers start their two-day meeting on Tuesday and are expected to discuss just how much of a risk the escalating US trade war poses to Japan’s economy.
“We would expect this adjustment in the pricing of the terminal rate to be maintained following the BOJ meeting,” said Lee Hardman, senior currency analyst at MUFG, referring to market expectations that rose from around 0.9 per cent at the end of 2024 to close to 1.2 per cent.
Elsewhere, the Australian dollar consolidated around US$0.6368 after rising to its highest in a little less than a month on Monday.
Bitcoin slipped 1.6 per cent to US$82,609. REUTERS
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