THE euro rose on Friday (Mar 14) after German parties agreed on a fiscal deal that could boost defence spending and revive growth in Europe’s largest economy.
The dollar weakened against the euro but rose against the Swiss franc and the yen, extending gains as data showed inflation expectations picked up, suggesting the US Federal Reserve will likely be patient in cutting interest rates.
German Chancellor-in-waiting Friedrich Merz announced he had secured the crucial backing of the Greens for a massive increase in state borrowing.
The deal will likely be approved by the outgoing parliament. It includes a 500-billion-euro (S$727 billion) fund for infrastructure, and sweeping changes to borrowing rules.
Dominic Bunning, head of G10 FX Strategy at Nomura, said he sees upside for the euro especially against the Swiss franc and British pound on prospects of German fiscal spending.
“We expect the German fiscal reform to pass next week and the ECB holding rates steady in April, a more hawkish outcome than is currently priced in,” Bunning said. “The USD leg may remain somewhat volatile as US exceptionalism fears wane, but tariffs pose some USD upside risks.”
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The euro rose 0.27 per cent to US$1.087625. Against the pound, the euro gained 0.48 per cent to 84.105 pence and rose 0.62 per cent to 0.96260 against the Swiss franc. It is on track for a second straight week of gains against the dollar, pound, and the franc.
The University of Michigan survey on Friday showed US consumer sentiment plunged in March but inflation expectations soared on worries about the impact of President Donald Trump’s sweeping tariffs. Consumers’ 12-month inflation expectations jumped to 4.9 from 4.3 per cent in February.
The dollar strengthened 0.35 per cent to 0.885 Swiss franc and up 0.58 per cent for the week. Against the Japanese yen, the dollar strengthened 0.48 per cent to 148.50 and was up 0.30 per cent this week.
Japanese companies agreed to raise wages by 5.46 per cent this year, topping both last year’s preliminary and final figures and likely marking the highest pay hike in 34 years.
The data is one important input into the Bank of Japan’s decision-making. Economists and markets see the central bank standing pat at its meeting next week as policymakers gauge global risks.
The pound weakened after the British economy unexpectedly contracted by 0.1 per cent in January, but stayed not far below its four-month peak of $1.2990 hit on Wednesday. Sterling weakened 0.15 per cent to US$1.29310 but was on track for the second straight week of gains.
On the back of the stronger euro, the dollar index, which measures the greenback against a basket of currencies including the yen and the euro, fell 0.08 per cent to 103.75. It is on track for the second straight week of losses.
“I think it’s a combination of obviously the tariff stuff, which creates a lot of noise and a lot of volatility and then in the U.S. we have an end of a regime of a lot of fiscal stimulus with this administration trying to reduce government spending,” said Brad Bechtel, global head of FX at Jefferies in New York.
“At the same time, we have the EU going in the opposite direction and expanding fiscal spending by quite a lot.”
Ex-central banker Mark Carney was sworn in as prime minister of Canada on Friday and immediately said he could work with Trump, who has threatened to impose tariffs that could devastate the Canadian economy. The Canadian dollar strengthened 0.51 per cent versus the greenback to C$1.44 per dollar.
“A volatile week is ending with a small flurry of what traders interpret as good news: the US government isn’t shutting down, China may seek to prop up its consumer sector further, Germany advanced toward fiscal reform, and Canada and the US turned down the heat of tariff discussions,” Macquarie analysts led by Thierry Wizman wrote in a note. REUTERS
