By Kevin Buckland
TOKYO (Reuters) -The euro extended four-month highs to the U.S. dollar on Thursday, following a surge in European bond yields on Germany's proposed 500 billion euro ($539.85 billion) infrastructure fund and overhaul in borrowing limits.
The greenback wallowed near a four-month trough against a basket of major peers after U.S. President Donald Trump's administration gave a one-month reprieve on auto import levies to Canada and Mexico, again showing how rapidly the trade landscape can shift.
The risk-sensitive sterling and Australian dollar benefitted, with the British currency touching a four-month peak. The Aussie reached a one-week high, buoyed additionally by solid economic growth at home and pledges of more stimulus from top trading partner China. The yuan, though, slipped back from a four-month top.
"The moves in European markets were remarkable ... as the German government, after long last, exercises its ample balance sheet," said Kyle Rodda, senior financial markets analyst at Capital.com.
"U.S. trade policy remains the biggest uncertainty for the markets," but the exemption for auto tariffs "supported hopes that rational heads prevail in the White House, and that even if trade relations don't improve, at least they won't get any worse," Rodda said.
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.
The euro climbed 0.3% to $1.0820 on Thursday for the first time since November 7.
The shared currency is up 4.3% this week, on track for its best week since March 2009, although a policy decision from the European Central Bank later in the day will bear scrutiny. A quarter-point rate cut is widely expected, but the focus will be on the scope and pace of easing beyond that.
Sterling rose as high as $1.2913, a level last seen on November 11.
"The upshot is that a chunk of U.S. exceptionalism has faded in the rates space," DBS analysts wrote in a client note.
"We suspect that the divergence in fiscal stances between the U.S. - perceived austerity - and Eurozone - aggressive spending - would be in play for the medium term."
At the same time, "we cannot rule out profit-taking after three days of aggressive USD selling", the analysts said.
The U.S. dollar index slipped to 104.09 for the first time since November 6.
The dollar was flat at 148.83 yen.
It edged up 0.1% to 7.2388 yuan in the official market, but that was after falling 0.7% over the previous two sessions.