Germany’s Fiscal Shift Boosts Euro, Fuels Market Surge

In a day packed with developments, Germany’s groundbreaking fiscal decision took center stage, overshadowing the noise surrounding President Donald Trump’s tariffs. The country’s move to lift fiscal restrictions in a bid to strengthen Europe’s defenses not only boosted the euro to its highest level in three months but also triggered a selloff across global bond markets, from German bund futures to U.S. Treasuries. Meanwhile, European equity futures soared during Asian trading on Wednesday.

The German announcement to establish a special defense fund and reform government borrowing regulations has prompted some analysts to advise purchasing the euro, signaling an improved outlook for both the currency and the broader region. Strategists at Deutsche Bank and Societe Generale have expressed confidence in the euro’s potential to outperform the U.S. dollar, citing Europe’s growing fiscal flexibility as a cushion against the impact of U.S. tariffs and a weakening U.S. economy.

The euro reached $1.0627 on Tuesday, its highest level since December, following Germany’s commitment to unlock significant investments for defense and infrastructure. This shift has fueled optimism about Europe’s economic prospects, especially as the U.S. economy begins to lose momentum.

George Saravelos, Deutsche Bank’s global head of FX strategy, described the move as “the biggest and fastest fiscal policy shift in post-unification German history.” He believes the change is enough to adopt a bullish stance on the euro, with his team targeting a rise to $1.10. Saravelos emphasized that Germany and Europe’s newfound fiscal flexibility would not only mitigate the effects of U.S. tariffs but could also pave the way for future economic growth once the tariffs’ impact subsides.

Deutsche Bank economists predict a “meaningful upside” to their German growth forecast of 1% for next year, further bolstering the positive sentiment around the euro. Meanwhile, Saravelos also pointed out that the tariffs announced by the U.S. are expected to have a “noticeable negative impact” on the American economy.

Germany’s decision to release hundreds of billions of euros for defense and infrastructure investments marks a decisive departure from its traditionally strict fiscal policies. This shift has created additional optimism for the eurozone’s economy just as the U.S. economy begins to falter, putting downward pressure on the U.S. dollar.

Global defense stocks have surged in response, with German defense contractor Rheinmetall AG emerging as one of the top performers on the MSCI World Index this year.

According to Olivier Korber of Societe Generale, increased defense spending and progress toward a resolution in the Ukraine-Russia conflict will likely benefit the euro. Korber also noted that while U.S. yields have been declining, the dollar has yet to adjust, suggesting further downside for the greenback.

Credit Agricole, ranked as the top euro-dollar forecaster last quarter by Bloomberg, shares the view that the euro will continue to rise, although they caution that trade-related setbacks could cause temporary dips. Valentin Marinov, head of G-10 FX strategy at Credit Agricole, stated that the latest developments have made him more optimistic, suggesting that the euro could reach $1.07 by year-end.

On the other hand, Citigroup’s strategists had to retract their bearish outlook on the euro after the single currency’s recent rally. In a note released Tuesday, they acknowledged that Germany’s fiscal pledges toward defense had surpassed expectations, prompting a reassessment of their previous stance.