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The euro is on track for its best week against the dollar since the global financial crisis, as investors bet that Germany’s historic fiscal stimulus will help power an economic recovery in the Eurozone.
The single currency has climbed more than 4.5 per cent against the dollar this week, its biggest rise since 2009, on the prospects for a rebound in Europe just as Donald Trump’s aggressive trade policy raises concern over the health of the American economy.
The lightning rally in the euro comes after Germany’s Chancellor-in-waiting Friedrich Merz announced a deal to fund investment in defence and infrastructure, as European leaders prepare to shoulder more of the burden for the region’s security and support Ukraine.
On Friday the euro was up 0.6 per cent at $1.085, its strongest level since early November.
The European Central Bank reduced interest rates to 2.5 per cent on Thursday, but signalled a possible slowdown in future cuts. Following the ECB move and Germany’s stimulus plan, traders are now fully pricing just one cut this year, down from two a week ago.
“Trump has effectively pushed towards European co-operation which none of us had on our bingo cards,” said Adam Pickett, head of global macro strategy at Citigroup. “It’s a game-changer for interest rates going forward . . . the ECB might need to cut less.”
The prospect of faster Eurozone expansion is supporting the single currency just as a string of disappointing US economic data and growing fears over the impact of Trump’s erratic tariff policies have hit the dollar.
According to levels in swaps markets, traders now expect the Federal Reserve to make three quarter-point interest rate reductions this year compared with expectations at the start of the year for less than two.
“There was the view that the US would almost be immune from tariffs . . . but instead there is now much more uncertainty,” said Pickett.
The euro’s resurgence marks a dramatic reversal from its weakness following Trump’s election victory in November, when the dollar rallied on hopes the US president’s programme for tax cuts and deregulation would boost the American economy.
A number of investment banks have now ripped up previous predictions that the euro could fall to parity with the dollar.
Until this week, economists had expected the German economy, the eurozone’s largest, to stagnate this year, weighing on the euro. Analysts at Goldman Sachs said the economy could expand by as much as 2 per cent next year if the fiscal package was swiftly implemented, up from a previous forecast of 0.8 per cent.
The euro’s surge comes ahead of the release on Friday of the monthly US jobs report, which is expected to show the economy added 160,000 positions in February, up from 143,000 in January.
Lee Hardman, senior currency analyst at MUFG, said that a run of weaker US economic data had left investors “leaning more towards a softer report today”.
In a sign of the broad weakness in the dollar, the US currency is close to giving up all the gains against other major currencies it had made since Trump’s election victory.
“The street is turning quite bullish on the euro now . . . [it is] hard not to jump on the bandwagon,” said Brad Bechtel, an analyst at Jefferies.
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