Dollar Under Pressure as U.S. Yields Drop, Euro Strengthens on German Fiscal Hopes

The U.S. dollar remained under pressure on Tuesday, hovering just above a two-month low, as declining U.S. Treasury yields and growing expectations of increased German fiscal spending bolstered the euro.

Key Market Movements

• Euro (EUR/USD): Up 0.3% to $1.0497, supported by speculation that Germany may increase defense spending, leading to higher euro zone yields.
• British Pound (GBP/USD): Firmed 0.2% to $1.2654.
• U.S. Dollar Index (DXY): Down 0.25% at 106.45, just off Monday’s two-month low.

U.S. Yields & Dollar Weakness

• The 10-year U.S. Treasury yield fell 7 basis points to 4.32%, its lowest since mid-December, reflecting concerns about the U.S. economy.
• Meanwhile, the 10-year German Bund yield remained flat at 2.47%, widening the U.S.-Germany yield spread to 185 basis points—the largest in favor of the euro since November.
• Germany’s potential boost in defense spending is seen as a positive for the euro, prompting Deutsche Bank’s George Saravelos to shift his stance on the EUR/USD from bearish to neutral.

Trade & Tariff Developments

• Trump reaffirmed that tariffs on Mexico and Canada will proceed as planned by March 4, despite efforts from both countries to address border security and fentanyl smuggling.
• Market reaction was subdued, though the Canadian dollar (CAD) weakened slightly, with USD/CAD hitting a one-week high of C$1.428, still well below its February 3 peak of C$1.4792.
• Market volatility expectations for CAD rose to their highest in two weeks, but analysts believe risk premiums may rise further toward the end of the week.

Other Currencies

• The Japanese yen (JPY/USD) remained steady at 149.72 per dollar, after briefly touching 148.5 on Monday, its strongest level since mid-December.
• Yen strength has been driven by market bets on further rate hikes from the Bank of Japan.

Market Outlook

• The dollar’s near-term direction will likely hinge on U.S. economic data and Fed policy expectations.
• The euro’s outlook remains tied to German fiscal policy and yield differentials.
• Tariff concerns could lead to increased volatility for the Canadian dollar as the March 4 deadline approaches.