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After European leaders revealed substantial investment plans for defense and infrastructure, the euro experienced a surge against the US dollar (EUR/USD). This coincides with President Trump’s acknowledgment that tariffs are causing some disruption to the US economy. The necessity for EUR/USD to climb substantially higher, perhaps to 1.08, will depend largely on whether US economic activity weakens further.
The DXY dollar index fell below 106 as European currencies gained strength on expectations of significant fiscal stimulus. Critics suggest that European leaders tend to react only in times of crisis, such as the potential withdrawal of US security support from Europe. Key events include the European Commission activating national escape clauses from the Stability and Growth Pact, potentially unlocking EUR 650 billion in national spending, and German leaders suspending the debt brake to create a EUR 500 billion infrastructure fund.
This European fiscal stimulus arrives as new US tariffs negatively impact global equity markets and Treasury yields, weakening the US dollar. Despite the uncertainty surrounding tariff policy, the US administration seems committed to using tariff revenues for its policy initiatives.
The dollar remains vulnerable to weak US economic data, particularly before the focus shifts to tariffs in April. This week’s attention will be on the US jobs report. A significant miss in Friday’s NFP report could push DXY down to the 104.00 area.
EUR/USD broke higher on the prospect of a major fiscal stimulus from Europe, particularly Germany. The focus is now on whether these fiscal changes will swiftly pass through parliament. While looser fiscal and tighter monetary policy typically benefit a currency, the EUR/USD story is complicated by the fact that this fiscal news hasn’t affected European Central Bank policy expectations, potentially due to the impending tariff threat.
Near-term, US activity data will determine whether EUR/USD trades up to 1.0670/80, with a potential risk to 1.0800 if payrolls significantly underperform. Longer-term forecasts may need adjustment considering the potential impact of broader US tariffs next month.
