SINGAPORE: The euro rose to its strongest level in nearly four months on Wednesday after Germany’s conservatives and the Social Democrats agreed on a historic debt overhaul, while trading in currencies elsewhere was volatile amid a flurry of headlines.
Markets were still reeling from the fallout of a trade war triggered by US President Donald Trump following his new 25% tariffs on imports from Mexico and Canada that took effect on Tuesday, along with a doubling of duties on Chinese goods to 20%.
Canada and China quickly acted in kind the same day, while Mexican President Claudia Sheinbaum vowed retaliation but without details, saying she would announce Mexico’s response on Sunday.
The loonie was last 0.12% weaker at C$1.4407, while the Mexican peso was recovering some of its losses and last stood at 20.5807 per dollar.
Investors were also digesting news of Reserve Bank of New Zealand (RBNZ) Governor Adrian Orr’s surprise resignation, growth figures in Australia and statements from Beijing as policymakers kick off the annual meeting of the National People’s Congress (NPC), China’s rubber-stamp parliament.
The euro emerged as a clear winner from all of the market uncertainty as it rose to its highest since November 13 at $1.0637 early on Wednesday, before later trimming some of its gains to last trade 0.09% lower at $1.0616.
The common currency drew support from news that the parties hoping to form Germany’s next government agreed to create a 500 billion euro ($530.95 billion) infrastructure fund and to overhaul borrowing rules in a tectonic spending shift to revamp the military and revive growth in Europe’s largest economy.
“Optimism around increased defence spending in Europe definitely played a key role in supporting the euro,” said Carol Kong, a currency strategist at Commonwealth Bank of Australia.
“If we get an unexpectedly large lift in the debt brake, I think it can probably push the euro up further, and of course, any further announcements on increased defence spending will also bolster expectations for European growth and therefore support the euro.”
The rise in the euro, meanwhile, kept the US dollar subdued, as it struggled to recoup its losses from the previous session.
Sterling hovered near a three-month top against the dollar at $1.2795, while the yen similarly held steady at 149.88 per dollar.
Against a basket of currencies, the greenback languished near a three-month low at 105.61.
The latest tit-for-tat tariff moves exacerbated the dollar’s recent decline, after it tumbled 0.9% on Tuesday as investors fretted about the impact of a trade war on the US economy, which is already showing signs of weakness.
“Rising inflation expectations and tariff angst are threatening the path of the US economy towards a soft landing,” said Boris Kovacevic, global macro strategist at Convera.
“This ‘macro over tariffs’ narrative underscores the transition from US exceptionalism to rising stagflation risks. Sure, tariff hikes are theoretically positive for the dollar. However, investors are looking beyond the short-term safe haven flows and are worried about a prolonged growth slowdown.”
Beijing’s support
In Asia, China on Wednesday kept its economic growth target for this year unchanged at roughly 5%, committing more fiscal resources than last year to fend off deflationary pressures and mitigate the impact of rising US tariffs.
Premier Li Qiang will deliver a speech at the NPC later on Wednesday, detailing China’s policies for the rest of the year.
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Investors for now seemed unimpressed by the latest headlines from Beijing as the offshore yuan weakened 0.14% to 7.2632, while its onshore counterpart was little changed at 7.2654 per dollar.
“Growth, inflation and fiscal spend targets were all pretty much as expected,” said Charu Chanana, chief investment strategist at Saxo.
“It doesn’t look like China wants to go overboard with spending right away given the tariff threats as they potentially want to save ammunition for external threats later in the year.”
Down Under, the Aussie traded 0.2% lower at $0.6260, as risk aversion in markets overshadowed upbeat domestic data that showed Australia’s economy expanded at the fastest pace in two years in the December quarter.
The New Zealand dollar similarly fell 0.2% to $0.5655, further pressured by news of Orr’s resignation from the RBNZ three years before his current term ends. His role will finish on March 31.
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