Key moments

• Germany’s proposed 500 billion euro infrastructure fund and the relaxation of borrowing limits triggered a significant rise in European bond yields, fueling a surge in the euro against the US dollar.
• The prospect of substantial fiscal stimulus has led analysts to abandon predictions of the euro falling to parity with the dollar.
• Some analysts forecast the euro’s rally may continue toward 1.10.

Euro Surges to a Four-Month High Against Dollar on Thursday, Fueled by Germany’s Ambitious Fiscal Stimulus Plans

The euro surged to a four-month peak against the U.S. dollar on Thursday, propelled by a significant increase in European bond yields following Germany’s announcement of a proposed 500 billion euro infrastructure fund and a restructuring of its borrowing constraints.
Germany’s landmark shift in public spending policy has triggered a substantial market reaction, driving both the euro’s value and government borrowing costs sharply higher.

In early Wednesday trading, the euro defied prevailing concerns about economic stagnation and Europe’s strategic vulnerabilities, rallying against the dollar. Concurrently, Germany’s 10-year borrowing costs experienced a near-quarter-percent jump, reaching a 17-month high, as investors rapidly adjusted to the anticipated impact of substantial defense and infrastructure spending.
These market movements stem from Tuesday’s announcement that Friedrich Merz, Germany’s incoming chancellor, reached an agreement with the Social Democrats (SPD) to circumvent the constitutional budget deficit limit. This news coincided with European Commission President Ursula von der Leyen’s proposal to raise hundreds of billions of euros to strengthen Europe’s defense capabilities.

“Europe, and Germany particularly, are demonstrating an unprecedented willingness to adjust their fiscal policies,” stated George Saravelos, head of global FX strategy at Deutsche Bank.
The potential for a significant fiscal stimulus package, or “bazooka,” pushed the euro up 0.7 percent against the dollar to 1.0722, its highest level since November. Saravelos anticipates the euro’s upward trend to persist until it reaches at least 1.10. While not all analysts share this level of optimism, there has been a swift revision of forecasts that previously predicted the euro could fall to parity with the dollar this year, driven by Europe’s subdued economic prospects.