The euro extended its gains, rising above $1.05 and approaching levels last seen in mid-December, as investors reacted to the prospect of increased defense spending by European governments and shifting geopolitical dynamics.
Euro near three-month high
European Commission President Ursula von der Leyen unveiled new EU plans aimed at strengthening Europe’s defense industry, which could mobilize nearly €800 billion in funding. Additionally, she proposed granting member states greater fiscal flexibility for defense-related investments, alongside €150 billion in loans to support military capabilities across the bloc. The news reinforced expectations of higher government spending, boosting investor confidence in the euro.
Geopolitical tensions also played a key role in driving market sentiment. US President Donald Trump’s suspension of military aid to Ukraine, just days after a public clash with Ukrainian President Volodymyr Zelensky, fueled speculation about potential shifts in European security policy. With the EU facing pressure to take greater responsibility for its own defense, investors bet on increased fiscal stimulus, which in turn supported the euro.
Eyes on tariff war
Meanwhile, traders continued to assess the escalating trade war, as new US tariffs on Canada, Mexico, and China took effect, prompting swift retaliatory measures from Canada and China, including counter-tariffs on key US exports. The rising trade tensions added uncertainty to global markets, increasing demand for alternative reserve currencies like the euro, particularly as concerns grew over potential economic fallout in the US.
ECB to meet on Thursday
On the monetary policy front, the European Central Bank (ECB) is widely expected to cut borrowing costs for the fifth time this week as inflationary pressures ease and economic growth remains tepid. Market participants are closely monitoring ECB President Christine Lagarde’s upcoming statements for further signals on the central bank’s policy outlook. A more dovish tone could temper the euro’s recent gains, though expectations of increased fiscal spending in Europe may provide continued support in the near term.
