(Bloomberg) — The euro is on the verge of notching its best weekly performance in 16 years, fueled by Germany’s pledge to ramp up defense spending and weakness in the US dollar.
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The currency rose as much as 1% to $1.0889 on Friday, its strongest level in four months, taking its surge in the week to almost 5%. Options volumes in the euro-dollar pair hit a record high on Wednesday, according to data from the Depository Trust & Clearing Corporation, with bullish wagers accounting for 70% of total demand in the week, versus February’s average of just over 50%.
Germany’s decision to step back from decades of fiscal reticence has fanned expectations of European growth and stoked traders appetite for the single currency. Hundreds of billion of euros in potential investment from the region’s largest economy would give the European Central Bank less need to push on with rate cuts to spur growth, according to Brown Brothers Harriman strategists.
Meanwhile, strategists at Bank of America Corp. revised up their forecasts for the euro, citing this week’s fiscal announcements and predicting the currency could rally around 6% from current levels by year-end to hit $1.15.
“The announced German fiscal package is a watershed moment for the euro,” said the BofA strategists led by Michalis Rousakis. “Meanwhile, policy uncertainty poses downside risks to US growth.”
Short-term options sentiment in the common currency, as depicted by so-called risk reversals, rose to bullish levels last seen half a decade ago. In the long-term, traders are the least bearish on the euro in three years.
Meanwhile, a Bloomberg gauge of the US dollar closed out its worst week since November 2022, falling more than 2%.
Immediately after the German spending plans were unveiled, hedge funds added bullish options structures that targeted a move as high as $1.20 into year-end, according to FX traders familiar with the transactions who asked not to be identified because they aren’t authorized to speak publicly.
Options that pay out on a rally above $1.12 and $1.15 have also been in play since then. The DTCC data show large interest this week for $1.10 strikes, while traders also bet on a move above $1.20 over the next year.
Speculative traders in the derivatives market further cut euro shorts in the week ended Tuesday, the day the currency hit a fresh 2025 high on reports of greater defense spending in Europe. Non-commercial investors now hold some $1.3 billion in bearish positions on the common currency, data released Friday by the Commodity Futures Trading Commission and aggregated by Bloomberg show. That’s the least since November.