Euro Rises as German Fiscal Deal Boosts Optimism; Dollar Weakens

The euro strengthened on Friday following news that German political parties had reached a fiscal agreement that could boost defence spending and stimulate economic growth in Europe’s largest economy.

Meanwhile, the U.S. dollar weakened against the euro but gained ground against the Swiss franc and Japanese yen, supported by optimism that the U.S. government will avoid a shutdown over the weekend. Additionally, inflation expectations in the U.S. ticked higher, suggesting that the Federal Reserve may take a cautious approach to cutting interest rates, further influencing currency movements.

Germany’s Fiscal Deal Sparks Optimism

Friedrich Merz, Germany’s Chancellor-in-waiting, announced that he had secured crucial support from the Green Party for a massive increase in state borrowing. The deal, which is expected to pass in Germany’s outgoing parliament next week, includes a €500 billion ($544.30 billion) infrastructure fund and significant reforms to borrowing rules.

The announcement boosted market confidence, as Germany’s fiscal expansion could help revive the sluggish economy and support the euro.

Euro Gains Across Markets

Market strategists believe that Germany’s fiscal expansion could provide a tailwind for the euro, particularly against the Swiss franc and British pound.

Dominic Bunning, Head of G10 FX Strategy at Nomura, noted that the euro could see further gains:

“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 U.S. exceptionalism fears wane, but tariffs pose some USD upside risks.”

As a result, the euro rose 0.27% to $1.087625, gained 0.48% against the British pound to 84.105 pence, and climbed 0.62% to 0.96260 against the Swiss franc. The euro is on track for a second consecutive week of gains against the dollar, pound, and franc.

U.S. Dollar Faces Mixed Sentiment

Despite the euro’s strength, the U.S. dollar found some support against the Swiss franc and the yen, thanks to rising inflation expectations and growing optimism that the U.S. government will avoid a shutdown.

While markets remain uncertain about the Federal Reserve’s rate-cut timeline, the recent inflation data suggests the central bank may delay monetary easing, keeping some support under the dollar in the near term.

The euro’s positive momentum highlights growing market confidence in Germany’s fiscal stimulus and its potential impact on the European economy. While the dollar remains under pressure against the euro, its resilience against the yen and Swiss franc suggests investors are still watching U.S. economic developments closely.

With the European Central Bank’s upcoming decision and Germany’s fiscal package approval looming, traders will keep a close eye on further currency movements in the coming weeks.