Euro Hits 4-Month High After Germany’s Historic Debt Reform, Trade War Fallout Looms

Image Credit: Reuters

 

The euro surged to its highest level in nearly four months on Wednesday, boosted by an agreement between Germany’s conservatives and Social Democrats on a significant debt overhaul. However, other currencies saw volatility amid a flurry of market-moving headlines.

Markets were still reacting to the impact of the trade war ignited by U.S. President Donald Trump’s new 25% tariffs on imports from Mexico and Canada, which took effect on Tuesday. Trump also doubled the tariffs on Chinese goods to 20%. China and Canada swiftly retaliated, while Mexican President Claudia Sheinbaum promised retaliation without providing details, stating Mexico’s response would come on Sunday.

The Canadian dollar (loonie) weakened 0.12% to C$1.4407, while the Mexican peso recovered some losses, trading at 20.5807 per dollar.

In addition, investors were processing news of the surprise resignation of Reserve Bank of New Zealand Governor Adrian Orr, along with economic growth data from Australia and remarks from Beijing as the National People's Congress (NPC), China’s annual parliamentary meeting, commenced.

The euro was the standout performer in the midst of market uncertainty, rising to $1.0637, its highest point since November 13, before trimming some of its gains and ending 0.09% lower at $1.0616.

The common currency benefited from news that Germany’s political parties had agreed to establish a 500 billion euro ($530.95 billion) infrastructure fund and to overhaul borrowing rules in a major shift toward military spending and growth revival in Europe’s largest economy. 

“Optimism around increased defence spending in Europe was a key factor supporting the euro,” said Carol Kong, a currency strategist at Commonwealth Bank of Australia. “If the debt brake is increased significantly, it could push the euro higher, and any further defense spending announcements would further boost European growth expectations and strengthen the euro.”

The euro’s rise kept the U.S. dollar subdued as it struggled to recover losses from the previous session. Sterling hovered near a three-month high at $1.2795, while the Japanese yen remained steady at 149.88 per dollar. 

The U.S. dollar index, which measures the greenback against a basket of major currencies, hovered near a three-month low of 105.61.

The trade war’s escalation added to the dollar's recent decline, after it fell 0.9% on Tuesday as concerns grew about the impact of the tariff battle on the U.S. economy, which was already showing signs of weakness.

"Rising inflation expectations and tariff concerns are threatening the U.S. economy's path toward a soft landing," said Boris Kovacevic, a global macro strategist at Convera. "This 'macro over tariffs' narrative highlights the shift from U.S. exceptionalism to rising stagflation risks. While tariff hikes theoretically benefit the dollar, investors are looking beyond short-term safe haven flows, fearing a prolonged slowdown."

In Asia, China’s government maintained its growth target of around 5% for the year, committing more fiscal resources than last year to combat deflationary pressures and mitigate the impact of rising U.S. tariffs. Premier Li Qiang is scheduled to speak at the NPC later Wednesday, outlining China’s policy for the year.

Investors, however, appeared unimpressed by the latest headlines from Beijing. The offshore yuan weakened 0.14% to 7.2632 per dollar, while the onshore yuan remained largely unchanged at 7.2654.

"Growth, inflation, and fiscal spending targets were largely as expected," said Charu Chanana, chief investment strategist at Saxo. "It seems China is not willing to ramp up spending immediately, likely saving resources for potential external challenges later in the year due to tariff threats."

Down under, the Australian dollar traded 0.2% lower at $0.6260, overshadowed by broader risk aversion in the markets, despite strong domestic data showing Australia's economy grew at its fastest pace in two years in the December quarter. The New Zealand dollar similarly fell 0.2% to $0.5655, pressured by Orr's surprise resignation from the Reserve Bank of New Zealand, effective March 31.

($1 = 0.9417 euros)

 

 

 

 

Paraphrasing text from "Reuters" all rights reserved by the original author