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The euro posted its strongest three-day rally in over two years, rising 3.1% to $1.07. The sharp move prompted major banks, including Deutsche Bank and MUFG, to revise their euro forecasts higher, abandoning previous predictions of a drop to parity.
The catalyst for the surge was Germany’s plan to modify its debt brake rules, allowing increased defense and infrastructure spending. This shift in fiscal policy, combined with the European Commission’s proposal to borrow €150 billion for defense funding, has bolstered confidence in the euro. Rising European bond yields further supported the currency, making euro-denominated assets more attractive relative to U.S. Treasuries.
U.S. Data Weakens Dollar Sentiment
On the U.S. side, concerns about economic growth weighed on the dollar. The ADP employment report showed private payrolls grew by just 77,000 in February, well below the 148,000 forecast. This weak labor market signal added to concerns about potential slowing in broader economic activity.
Meanwhile, U.S. services sector growth showed resilience, with the ISM Services PMIISM Services PMI climbing to 53.5, above expectations. However, rising input prices raised inflation concerns, especially with fresh trade tariffs on Canada, Mexico, and China set to increase costs further.
Tariffs and Treasury Yields Add to Uncertainty
The market is closely watching President Donald Trump’s aggressive trade stance. This week, his administration imposed a 25% tariff on imports from Canada and Mexico and raised duties on Chinese goods to 20%. Retaliatory measures from these trading partners could disrupt supply chains and weigh on U.S. growth.
Treasury yields climbed as investors evaluated the inflationary impact of tariffs. The 10-year U.S. Treasury yield rose, but the eurozone’s surging bond yields have been more compelling, reinforcing capital flows into European markets.
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