Germany’s Greens Party co-leader Franziska Brantner said in an interview with Bloomberg News that her party was ready to negotiate to reach a deal for increased state borrowing to boost defence spending and revive growth.
That lifted the euro to US$1.09205 against the greenback in early European trading, its highest since November. It was last up 0.7%.
“Markets very much like that news and it really offers counterpoint to yesterday’s headlines,” said Nick Rees, head of macro research at Monex Europe.
Yesterday, the common currency’s gains were capped by the Greens’ refusal to back sweeping reforms to debt rules and a special €500 billion infrastructure fund, a move which could derail a spending bonanza that had excited markets, and driven a steep sell-off in German government bonds.
A weaker US dollar only added to those gains.
‘Overreacted’
Eyes were also on the broad US dollar, after the Nasdaq fell 4% overnight and the S&P 500 slid 2.7%.
“Historically, the dollar outperforms when we get a solid rise in volatility, but when the US economy and US equity market are the central point of concern, this is now limiting the attractiveness of the dollar,” said Chris Weston, head of research at broker Pepperstone in Melbourne.
The US dollar index, measuring the US currency against six peers, fell to levels last seen in October.
It is on course for its seventh-straight day of losses.
“We still think the hard data points to an economy that’s slowing but it’s not slowing too fast. Recession fears is very much overdone,” Rees said.
“The markets have overreacted … the dollar shouldn’t really be trading this weak,” he said.
As US bond yields have gone down and global yields rose, the gap between 10-year US and German yields has shrunk nearly 40 basis points (bp) since a week ago and the gap between US and Japanese yields has fallen nearly 20bp.
The turmoil in equities was triggered by a Trump Fox News interview, in which the president talked about a “period of transition,” dashing investor bets he would back away from his aggressive policies.
The yen earlier made a five-month peak of 146.55 per US dollar before losing ground to trade at 147.45 a dollar.
In other currencies, the British pound gained 0.4% against the dollar to US$1.2928.
There were also sharp moves in Scandinavian currencies.
The Swedish crown firmed past the symbolic 10 crowns to the dollar level for the first time since December 2023 after Riksbank governor Erik Thedeen said recent inflation outcomes in Sweden have been slightly higher than expected and called for vigilance.
The US dollar was last down 0.9% at 10.04 crowns, while the euro was down 0.3% at 10.933 crowns.
The Norwegian crown strengthened at 11.6270 to euro and 10.590 to the dollar, its strongest in five months.