By Gertrude Chavez-Dreyfuss
NEW YORK (Reuters) -The euro hit four month highs on Wednesday against the U.S. dollar, as Europe's growth prospects improved after Germany's proposed 500-billion euro ($531 billion) infrastructure fund, potentially offsetting global trade tensions.
The single currency is up nearly 3.7% this week, already on track for its best week since November 2022, taking another leg higher after a late Tuesday announcement from the parties hoping to form Germany's next government of the planned new fund and an overhaul of borrowing rules.
It rose to its highest since November 8 against the dollar was last up 1.3% at $1.0765. The euro also gained against other currencies, including the British pound, the Japanese yen and the Swiss franc,.
"By launching a 500-billion euro investment fund and working to reform the country's overly-restrictive debt brake, German leaders are taking steps that could reinvigorate growth at the core of the euro project, help reverse a long decline in underlying economic infrastructure, and establish a strong bulwark against Russia's westward expansion" said Karl Schamotta, chief market strategist, at Corpay in Toronto.
"Traders are reacting with unbridled optimism, bidding the euro up against all of its major counterparts."
The dollar index, the reverse proxy for the euro being the largest component of the index, fell more than 1% at 104.45 and hit its lowest since November 8 as well.
Lee Hardman, senior currency analyst at MUFG, cautioned however about the downside risks for the euro from U.S. President Donald Trump's tariff threats, saying early April will be a key "crunch point" for Europe's economy.
Germany's bond yields surged as investors digested the additional borrowing expected to back the debt overhaul, with 30-year yields jumping as much as 25 basis points at one point. Short term yields also rose, boosting the euro against the dollar.
Also in the mix, the ECB is expected to cut interest rates on Thursday, with more to follow as it tries to prop up weak economic growth. If fiscal stimulus by Europe's biggest economy supports growth, it would reduce pressure on the ECB to cut rates more aggressively and is a "positive shock" for the euro, Hardman added.
Other European currencies also rallied against the dollar, with sterling rallying to a four-month peak of $1.2871 and last traded up 0.5% at $1.2862. Against the Swiss franc, the dollar was slightly higher on the day at 0.8899 franc .
Sweden's crown, sensitive to European equities, particularly defense stocks, continued its recent rally, and was at its strongest on the dollar in five months. The dollar was last down 1.4% at 10.267 crowns, and the euro was 0.3% lower at 11.03 crowns.