Berlin: For all the noise surrounding president Donald Trump’s tariffs, perhaps the most significant development for global financial markets on an exceptionally busy day yesterday was Germany’s decision to break its fiscal shackles to transform Europe’s defences.
Not only did it drive the euro to a three-month high, it sparked a sell-off in global bond markets from bund futures to US Treasuries and sent European equity contracts surging in Asian trading yesterday.
Some strategists are now recommending buying the euro against the greenback, citing an improved outlook for the common currency and the region amid efforts to boost spending.
Deutsche Bank and Societe Generale issued calls Tuesday, betting on the euro outperforming the US dollar as Europe takes steps to shore up the economy and limit potential impact of US tariffs even as prospects for the US economy sour.
The moves came as the common currency touched US$1.0627, the highest since December, on Tuesday after news broke on Germany’s creation of a special defence fund and plan to reform its stance on government borrowing.
For George Saravelos, Deutsche Bank’s global head of foreign-exchange strategy, the development is “the biggest and fastest fiscal policy shift in post-unification German history” and enough to adopt a bullish view on the euro.
His team is targeting the European common currency to strengthen to US$1.10.
“Europe and Germany in particular are showing a historically unprecedented responsiveness to revising the fiscal stance,” he said in a note to clients.
“This flexibility will not only likely mute the potential impact of upcoming tariffs but creates an upside growth bias once the impact of tariffs has been absorbed.”
The already announced US tariffs will have “noticeable negative impact on the US economy”, Saravelos added.
Economists at Deutsche Bank suggested there was “meaningful upside” to their German growth forecast of 1% for next year, in a separate note.
Germany said it will unlock hundreds of billions of euros for defence and infrastructure investments in a dramatic shift away from tight controls over government borrowing.
That created additional optimism for the regional economy at the same time as US economy is losing steam, weighing on the US dollar.
Global defence stocks have surged in recent weeks, catapulting the likes of Germany’s Rheinmetall AG to the top of MSCI World Index’s best performers this year.
Defence spending and moves toward a Ukraine-Russia war resolution stand to benefit the euro, wrote Societe Generale’s Olivier Korber in a note to clients on Tuesday. — Bloomberg
