- European Bond Yields Drive Euro Strength as U.S. Dollar Slips
The euro extended its rally to four-month highs against the U.S. dollar on Thursday, buoyed by surging European bond yields and Germany’s proposed €500 billion ($539.85 billion) infrastructure fund. The German government’s decision to overhaul borrowing limits and inject significant fiscal stimulus into the economy ignited investor enthusiasm, leading to strong movements in the currency and bond markets.
Meanwhile, the U.S. dollar remained under pressure, hitting a four-month low against a basket of major currencies. The downward pressure on the greenback was exacerbated by the Trump administration’s decision to grant a one-month reprieve on auto import levies for Canada and Mexico, highlighting the ongoing fluidity of U.S. trade policy.
Other major currencies, including the British pound and the Australian dollar, also saw gains, as risk sentiment improved on the back of easing trade concerns and promising economic data.
European markets reacted positively to Germany’s announcement of a massive infrastructure spending plan, marking a significant shift in the country’s traditionally conservative fiscal stance. The proposal includes a €500 billion investment in infrastructure projects, designed to modernize transportation, energy, and digital networks while providing an economic boost amid global uncertainties.
“The moves in European markets were remarkable … as the German government, after long last, exercises its ample balance sheet,” said Kyle Rodda, senior financial markets analyst at Capital.com.
Germany’s decision to increase public investment and revise borrowing constraints sent bond yields surging. The 30-year German bond yield jumped as much as 25 basis points at one point, reflecting investor expectations for increased debt issuance to fund the program.
The euro responded by climbing to $1.0803, its highest level since November 8, before stabilizing around $1.0792 in Asian morning trade. With nearly a 4% gain this week, the euro is on track for its best weekly performance since March 2020.
Despite the strong rally in the euro, market participants are closely watching the European Central Bank (ECB) policy decision later in the day. A quarter-point interest rate cut is widely anticipated, but investors are particularly focused on the ECB’s guidance regarding the pace and scope of further monetary easing.
A dovish stance from the ECB could temper some of the euro’s gains, but the currency’s momentum is largely driven by the newfound optimism around fiscal policy rather than just monetary developments. Analysts suggest that Germany’s infrastructure spending could offset the effects of lower interest rates by stimulating economic activity and supporting broader eurozone growth.
The risk-sensitive British pound and Australian dollar capitalized on the shifting market sentiment, with both currencies touching notable highs.
Sterling climbed to $1.2906, its strongest level since November 11. The pound’s rise was supported by easing trade tensions and expectations that the Bank of England may take a less aggressive stance on interest rate cuts than previously anticipated.
The Australian dollar also benefited from improving global risk appetite, reaching a one-week high of $0.6345. Australia’s economic resilience, combined with additional stimulus measures from China—its largest trading partner—helped bolster the currency.
China’s National People’s Congress, which commenced its annual parliamentary meeting this week, signaled a renewed focus on boosting domestic consumption to safeguard economic growth amid ongoing trade disputes with the U.S.
The U.S. dollar index remained under pressure, lingering at 104.31 after slipping to 104.25 overnight—the lowest level since November 8. The greenback’s struggles were amplified by trade policy adjustments from the Trump administration.
In a significant development, the White House announced a one-month exemption for auto tariffs on Canada and Mexico. The decision was seen as a temporary relief for North American automakers, which had been bracing for the impact of 25% import duties.
“U.S. trade policy remains the biggest uncertainty for the markets,” said Rodda. “But the exemption for auto tariffs supported hopes that rational heads prevail in the White House, and that even if trade relations don’t improve, at least they won’t get any worse.”
The reprieve helped boost the Canadian and Mexican currencies, with the U.S. dollar falling to C$1.4327, its lowest level since February 27, and declining to 20.3933 Mexican pesos.
While the U.S. dollar weakened against most major currencies, it managed to gain 0.2% against the safe-haven Japanese yen, reaching 149.17 yen. The slight uptick suggests that investors were shifting out of traditional safety plays amid the improving market mood.
In offshore trading, the Chinese yuan remained close to its nine-day high from Wednesday, stabilizing at 7.2438 yuan per U.S. dollar. The yuan had fallen 0.9% over the previous two sessions but showed resilience as China’s economic support measures reassured investors.
As markets digest Germany’s fiscal stimulus plan and the latest U.S. trade developments, attention now turns to upcoming central bank decisions and economic data releases. The ECB’s policy stance will be a crucial factor in determining whether the euro’s rally continues or faces a correction.
Meanwhile, investors remain wary of potential shifts in U.S. trade policy, as past experience has shown that White House decisions can change rapidly. The uncertainty surrounding trade negotiations, along with the Federal Reserve’s monetary policy direction, will be key determinants of the dollar’s trajectory in the coming weeks.
For now, the euro stands strong, benefiting from renewed fiscal optimism in Europe, while the dollar remains under pressure amid shifting trade dynamics. Market participants will continue to monitor developments closely, as the global economic landscape remains in flux.
