EZ SQUARE

Euro hits four-month peak; US dollar languishes on tariff-driven fears

2025-03-06 09:20:17

By Gertrude Chavez-Dreyfuss

NEW YORK (Reuters) -The euro ascended to four-month highs on Wednesday against the U.S. dollar, as Europe’s growth prospects improved after Germany’s proposed 500 billion euro ($531 billion) infrastructure fund, potentially offsetting global trade tensions.

The greenback, on the other hand, fell against most currencies, weighed down by an uncertain growth outlook driven by fears about the impact of tariffs on inflation and the economy. Investors are now starting to price in the potential for outright U.S. contraction, with traders on the prediction market Kalshi currently implying a 42% chance of a U.S. recession this year.

"We are experiencing a change in sentiment when it comes to relying on American markets," said Juan Perez, director of trading, at Monex USA in Washington.

"If things are headed towards a restrictive protectionism, the financial system will start making adjustments and right now it seems shedding dollar positions is prudent. If tariffs and trade wars are perceived as negative on the American economy, we return to speculation over the chances for looser monetary policy."

The euro, meanwhile, climbed 4% this week, on track for its best week since November 2022, taking another leg higher after a late Tuesday announcement from the parties hoping to form Germany’s next government of the planned new fund and an overhaul of borrowing rules.

It rose to its highest since November 8 against the dollar and was last up 1.5% at $1.0791, on pace for its best daily gain since November 2023. The euro also gained against other currencies, including the British pound, the Japanese yen and the Swiss franc,.

"The expectation that increased government expenditure could stoke inflation has reinforced the case for tighter European Central Bank policy," wrote Fawad Razaqzada, market analyst, at City Index and Forex.com in emailed comments.

The dollar index, with the euro as its largest component, fell 1.2% to 104.29 and hit its lowest since November 8 as well.

Germany’s bond yields surged as investors digested the additional borrowing expected to back the debt overhaul, with 30-year yields jumping as much as 25 basis points at one point. Short-term yields also rose, boosting the euro against the dollar.

Also in the mix, the ECB is expected to cut interest rates on Thursday, with more to follow as it tries to prop up weak economic growth. If fiscal stimulus by Europe’s biggest economy supports growth, it would reduce pressure on the ECB to cut rates more aggressively and is a "positive shock" for the euro, said Lee Hardman, senior currency analyst at MUFG.

Other European currencies also rallied against the dollar, with sterling rising to a four-month peak of $1.2899 and it last traded up 0.8% at $1.2897. Against the Swiss franc, the dollar was up 0.2% at 0.8903 franc.

MORE TARIFFS

Signs of slowing economic growth in the United States, partly as a result of uncertainty about tariffs, also weakened the greenback. The dollar fell 0.6% against the yen to 148.87.

On Tuesday, U.S. President Donald Trump vowed again to impose reciprocal tariffs from April in his first speech to Congress since taking office. His 25% tariffs on imports from Mexico and Canada took effect on Tuesday, along with a doubling of duties on Chinese goods to 20%. Canada and China quickly acted in kind, while Mexican President Claudia Sheinbaum vowed retaliation but did not provide details.

However, on Wednesday, the White House walked back some of Trump’s tariff announcements. The Trump administration, according to the White House, will exempt automakers from the steep 25% tariffs on Canada and Mexico for one month as long as they comply with the terms of an existing free-trade agreement.

Currency traders, however, are still struggling to assess whether the tariffs will be permanent or if they are negotiable. The Canadian dollar rose 0.3% to C$1.4341 per U.S. dollar.

U.S. economic numbers on Wednesday, meanwhile, were mixed, with private payrolls slowing sharply last month, while the service sector expanding as price growth accelerated.

Private payrolls increased by only 77,000 jobs last month after an upwardly revised 186,000 gain in January. Economists polled by Reuters had forecast private employment rising 140,000.

U.S. services sector growth, on the other hand, unexpectedly picked up in February and prices for inputs increased. The Institute for Supply Management’s non-manufacturing purchasing managers index climbed to 53.5 last month from 52.8 in January.

In Asia, China pledged more fiscal stimulus on Wednesday, signalling greater efforts to boost consumption to protect economic growth amid heightened trade tensions with the United States. The offshore yuan edged up 0.2% to 7.239 per dollar.

The China-sensitive Aussie, traded 1.1% higher at US$0.6338, also boosted by upbeat domestic data.

Currency bid prices at 5 March 08:39 p.m. GMT

Description RIC Last U.S. Close Previous Session Pct Change YTD Pct High Bid Low Bid

Dollar index 104.27 105.57 -1.22% -3.89% 105.77 104.27

Euro/Dollar 1.0794 1.0627 1.58% 4.26% $1.0795 $1.0602

Dollar/Yen 148.8 149.66 -0.52% -5.39% 150.155 148.435

Euro/Yen 160.62 159.17 0.91% -1.59% 160.72 158.76

Dollar/Swiss 0.8908 0.8895 0.15% -1.84% 0.8915 0.8856

Sterling/Dollar 1.2896 1.2795 0.8% 3.12% $1.2899 $1.2771

Dollar/Canadian 1.4338 1.4389 -0.33% -0.27% 1.4451 1.4331

Aussie/Dollar 0.6336 0.6272 1.02% 2.4% $0.6343 $0.6235

Euro/Swiss 0.9616 0.9451 1.75% 2.37% 0.9623 0.9446

Euro/Sterling 0.8367 0.8304 0.76% 1.14% 0.838 0.83

NZ Dollar/Dollar 0.5725 0.5666 1.08% 2.35% $0.5731 0.5638

Dollar/Norway 10.9071 11.0743 -1.51% -4.03% 11.1414 10.8949

Euro/Norway 11.7725 11.7684 0.03% 0.03% 11.8364 11.7546

Dollar/Sweden 10.1928 10.4065 -2.05% -7.48% 10.453 10.192

Euro/Sweden 11.0034 11.0585 -0.5% -4.04% 11.0957 11.0017

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