Euro rallies on rising prospect of historic German debt deal

The euro rallied on Friday on rising prospects that German parties will agree a historic fiscal deal that could boost defence spending and revive growth in Europe's largest economy.

The euro rose 0.49 per cent to $1.0902. Against the pound, the euro gained 0.5 per cent to 84.19 pence and rose 0.7 per cent to 0.9637 against the Swiss franc.

German Chancellor-in-waiting Friedrich Merz reached an agreement with the Greens on Friday for a massive increase in state borrowing ahead of a parliamentary vote next week, a source close to the negotiations said.

Merz has been racing to persuade the outgoing German parliament to approve a 500 billion euro fund for infrastructure and sweeping changes to borrowing rules.

Worries around Germany's ability to pass the enormous increase in state borrowing had capped the euro's gains in the past two days.

"Short term it's another positive driver for the euro, but we'd be wary about getting too excited about the news, the market was already expecting it to come before next Tuesday," said Lee Hardman senior currency analyst at MUFG.

"It takes the risk of a disappointment off the table, however."

Elsewhere, the yen weakened on Friday after union wage talks in Japan concluded and the pound edged lower as British economic growth faltered, with investors also processing trade tensions and slowdown concerns.

The Japanese currency, which scaled a five-month peak earlier this week at 146.545 per dollar on safe-haven bids and market bets for further rate hikes in Japan, lost some ground to trade as weak as 149.02 a dollar on Friday.

The dollar was last up 0.6 per cent at 148.715 yen.

JAPANESE WAGE HIKE

Japanese companies agreed to raise wages by 5.46 per cent this year, topping both last year's preliminary and final figures and likely marking the highest pay hike in 34 years.

"The Rengo figures ... are still short of the more than 6 per cent figure that the union had been aiming for, which might have resulted in some JPY longs deciding to square up their positions," said Michael Brown, senior research strategist at Pepperstone.

Rengo, the country's largest union umbrella, had sought an average hike of 6.09 per cent this year.

The data is one important input into the Bank of Japan's decision making. Economists and markets see the central bank standing pat at its meeting next week as policymakers gauge global risks.

Another underperformer on Friday was the British pound after the British economy unexpectedly contracted by 0.1 per cent in January. Sterling was last down 0.1 per cent at $1.29385.

But still, the British currency was not far off its four-month peak of $1.2990 hit on Wednesday.

On the back of the stronger euro, the dollar index reversed course to be down 0.17 per cent at 103.65 after earlier rising to 104.09.

It had risen after top U.S. Senate Democrat Chuck Schumer on Thursday said he would vote to advance a Republican stopgap funding bill, signalling that his party would provide the votes to avert a government shutdown.