(Bloomberg) — For all the noise surrounding President Donald Trump’s tariffs, perhaps the most significant development for global financial markets on an exceptionally busy day was Germany’s decision to break its fiscal shackles to transform Europe’s defenses.
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Not only did it drive the euro to a three-month high, it sparked a selloff in global bond markets from bund futures to Treasuries and sent European equity contracts surging in Asia trading Wednesday.
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 dollar as Europe takes steps to shore up the economy and limit potential impact of US tariffs while prospects for the US economy sour. The moves came as the common currency touched $1.0627, the highest since December, on Tuesday on Germany’s creation of a special defense fund and plan to reform its stance on government borrowing.
For George Saravelos, Deutsche Bank’s global head of FX 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 common currency to strengthen to $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 will unlock hundreds of billions of euros for defense 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 dollar.
Global defense 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.
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