By Chibuike Oguh and Yadarisa Shabong
NEW YORK (Reuters) -The euro rose on Friday after German parties agreed on a fiscal deal that could boost defence spending and revive growth in Europe’s largest economy.
The dollar weakened against the euro but rose against the Swiss franc and the yen, underpinned by the likelihood the U.S. government will avert a shutdown over the weekend, extending gains as data showed inflation expectations picked up, suggesting the Federal Reserve will likely be patient in cutting interest rates.
German Chancellor-in-waiting Friedrich Merz announced he had secured the crucial backing of the Greens for a massive increase in state borrowing.
The deal will likely be approved by the outgoing parliament next week. It includes a 500 billion euro ($544.30 billion) fund for infrastructure and sweeping changes to borrowing rules.
Dominic Bunning, head of G10 FX Strategy at Nomura, said he sees upside for the euro especially against the Swiss franc and British pound on prospects of German fiscal spending.
"We expect the German fiscal reform to pass next week and the ECB holding rates steady in April, a more hawkish outcome than is currently priced in," Bunning said. "The USD leg may remain somewhat volatile as U.S. exceptionalism fears wane but tariffs pose some USD upside risks."
The euro rose 0.27% to $1.087625. Against the pound, the euro gained 0.48% to 84.105 pence and rose 0.62% to 0.96260 against the Swiss franc. It is on track for a second straight week of gains against the dollar, pound, and the franc.
The University of Michigan survey on Friday showed U.S. consumer sentiment plunged in March but inflation expectations soared on worries about the impact of President Donald Trump’s sweeping tariffs. Consumers’ 12-month inflation expectations jumped to 4.9% from 4.3% in February.
Top U.S. Senate Democrat Chuck Schumer said on Thursday he would vote to advance a Republican stopgap funding bill, signaling that his party would provide the votes to avert a government shutdown.
The dollar strengthened 0.35% to 0.885 Swiss franc and up 0.58% for the week. Against the Japanese yen, the dollar strengthened 0.48% to 148.50 and was up 0.30% this week.
Japanese companies agreed to raise wages by 5.46% this year, topping both last year’s preliminary and final figures and likely marking the highest pay hike in 34 years.
The data is one important input into the Bank of Japan’s decision-making. Economists and markets see the central bank standing pat at its meeting next week as policymakers gauge global risks.
The pound weakened after the British economy unexpectedly contracted by 0.1% in January, but stayed not far below its four-month peak of $1.2990 hit on Wednesday. Sterling weakened 0.15% to $1.29310 but was on track for the second straight week of gains.
On the back of the stronger euro, the dollar index, which measures the greenback against a basket of currencies including the yen and the euro, fell 0.08% to 103.75. It is on track for the second straight week of losses.
"I think it’s a combination of obviously the tariff stuff, which creates a lot of noise and a lot of volatility and then in the U.S. we have an end of a regime of a lot of fiscal stimulus with this administration trying to reduce government spending," said Brad Bechtel, global head of FX at Jefferies in New York.
"At the same time, we have the EU going in the opposite direction and expanding fiscal spending by quite a lot."
Ex-central banker Mark Carney was sworn in as prime minister of Canada on Friday and immediately said he could work with Trump, who has threatened to impose tariffs that could devastate the Canadian economy. The Canadian dollar strengthened 0.51% versus the greenback to C$1.44 per dollar.
"A volatile week is ending with a small flurry of what traders interpret as good news: the US government isn’t shutting down, China may seek to prop up its consumer sector further, Germany advanced toward fiscal reform, and Canada and the US turned down the heat of tariff discussions," Macquarie analysts led by Thierry Wizman wrote in a note.
($1 = 0.9186 euros)