Sustainability of Euro Appreciation and US Dollar Depreciation
2025-03-12
■ Expectations for Germany's large-scale fiscal reforms and increased defense spending are high, and the interest rate gap between the United States and Germany has narrowed significantly
■ The widening of interest margin between long-term and short-term German treasury bond has raised the market's expectation of economic prospects, but the fear of additional issuance of treasury bond may put an end to the appreciation of the euro and the depreciation of the dollar
The current appreciation of the euro against the US dollar is remarkable. Last week, the euro rose sharply from the late $1.03 range to the late $1.08 range against the US dollar, with a weekly increase of 4.4%, the highest weekly increase since March 2009. The US dollar index, which measures the exchange rate of the US dollar against six major currencies (of which the euro accounts for more than 57%), fell to a four-month low, falling back to the late 103 range, with a weekly decline of 3.5%, the largest drop since November 2022. Factors for the appreciation of the euro include expectations for peace in Ukraine, eurozone economic data that exceeded expectations, and the policy guidelines of eurozone member states to expand fiscal spending, which have driven up government bond yields in European countries. Among them, Germany, which has always observed fiscal discipline, has a policy direction of large-scale fiscal reform and increased defense spending, which the market expects particularly strongly. The yield spread between the 10-year U.S. and German government bonds has narrowed from the 2.1% range in early February to the 1.3% range, strengthening the euro.
Since November 2022, the yield spread between the 10-year German government bond and the 2-year German government bond has been negative, but it rebounded to a positive value in September last year, and expanded to the 0.38% range as of the end of February, and is currently at its highest level since July 2022. The market has high expectations for demand-driven plans for infrastructure strengthening and increased defense spending announced by the Christian Democratic Union/Christian Social Union (CDU/CSU) and the Social Democratic Party (SPD), which are about to form a coalition government. However, there is a time lag between the implementation of infrastructure investment and the emergence of economic effects. In addition, the Green Party has stated that it does not support infrastructure and defense plans, and the market generally believes that the plan may not be approved in the new parliament convened on the 25th. In the process of finding a compromise, although the market still has expectations for the economic outlook, concerns about the issuance of additional government bonds remain. In the short term, the euro may find support near the 200-day moving average of $1.0721 against the US dollar and remain strong, but around $1.10, the trend of euro appreciation and dollar depreciation may come to an end.
■ The widening of interest margin between long-term and short-term German treasury bond has raised the market's expectation of economic prospects, but the fear of additional issuance of treasury bond may put an end to the appreciation of the euro and the depreciation of the dollar
The current appreciation of the euro against the US dollar is remarkable. Last week, the euro rose sharply from the late $1.03 range to the late $1.08 range against the US dollar, with a weekly increase of 4.4%, the highest weekly increase since March 2009. The US dollar index, which measures the exchange rate of the US dollar against six major currencies (of which the euro accounts for more than 57%), fell to a four-month low, falling back to the late 103 range, with a weekly decline of 3.5%, the largest drop since November 2022. Factors for the appreciation of the euro include expectations for peace in Ukraine, eurozone economic data that exceeded expectations, and the policy guidelines of eurozone member states to expand fiscal spending, which have driven up government bond yields in European countries. Among them, Germany, which has always observed fiscal discipline, has a policy direction of large-scale fiscal reform and increased defense spending, which the market expects particularly strongly. The yield spread between the 10-year U.S. and German government bonds has narrowed from the 2.1% range in early February to the 1.3% range, strengthening the euro.
Since November 2022, the yield spread between the 10-year German government bond and the 2-year German government bond has been negative, but it rebounded to a positive value in September last year, and expanded to the 0.38% range as of the end of February, and is currently at its highest level since July 2022. The market has high expectations for demand-driven plans for infrastructure strengthening and increased defense spending announced by the Christian Democratic Union/Christian Social Union (CDU/CSU) and the Social Democratic Party (SPD), which are about to form a coalition government. However, there is a time lag between the implementation of infrastructure investment and the emergence of economic effects. In addition, the Green Party has stated that it does not support infrastructure and defense plans, and the market generally believes that the plan may not be approved in the new parliament convened on the 25th. In the process of finding a compromise, although the market still has expectations for the economic outlook, concerns about the issuance of additional government bonds remain. In the short term, the euro may find support near the 200-day moving average of $1.0721 against the US dollar and remain strong, but around $1.10, the trend of euro appreciation and dollar depreciation may come to an end.