Euro Rises as Germany Unleashes Fiscal Spending

The euro strengthened after German parties reached a fiscal agreement to boost defense spending and revive growth. German Chancellor-in-waiting Friedrich Merz secured backing for increased state borrowing and infrastructure funding. The deal promises sweeping changes, potentially affecting global currency dynamics and impacting U.S. inflation expectations.

The euro saw a rise on Friday following an agreement among German parties on a fiscal deal aimed at boosting defense spending and reigniting growth in Europe's largest economy. The currency appreciated against the dollar, despite the American currency's overall strength, due to burgeoning inflation expectations hinting at a patient Federal Reserve.

German Chancellor-in-waiting Friedrich Merz announced crucial backing from the Greens for a significant increase in state borrowing, including a transformative 500 billion euro infrastructure fund. The reform is poised for approval by the outgoing parliament, marking potential changes in borrowing norms and fiscal priorities.

As the euro continued its ascent, currency strategist Dominic Bunning at Nomura predicted further appreciation in relation to the Swiss franc and the pound, supported by German fiscal expansion and steady ECB interest rates. Concurrently, U.S. consumer inflation expectations surged amid anticipated tariff impacts, as Senate Democrats indicated support for a stopgap funding bill to prevent a government shutdown.

(With inputs from agencies.)