Euro Surges 4% in June Outperforming Bitcoin as Germany's Fiscal Plan Shifts Focus to European Assets

A major currency pair, the euro-U.S. dollar (EUR/USD), has recently outperformed bitcoin in terms of price performance. In June, EUR/USD rose nearly 4% to 1.1786, outperforming bitcoin's 2.4% gain. Remarkably, both assets are nearly neck and neck in year-to-date performance, each up over 13%. Some observers believe EUR/USD still has room to run higher, a positive sign for EUR-pegged stablecoins, which have already benefited from the single currency's surge.

Germany's new fiscal plan, including significant infrastructure spending, is shifting investor focus from U.S. to European assets. The plan comprises an exemption of defense spending (over 1% of GDP) from the debt brake, a 500 billion euro infrastructure fund to be deployed over 12 years, and 100 billion of which will be immediately routed to the Climate Transition Fund. The remaining amount is for additional infrastructure investments, with 300 billion euros for the federal government and 100 billion euros for state governments. The plan will allow state governments to run annual deficits of up to 0.35% of GDP. The fiscal package's direct impact on German GDP is expected to be felt from next year, and it's expected to be sticky beyond 2027, with positive spillover effects for other Eurozone nations.

This is now changing the conversation to European assets, rather than U.S. assets. The focus on growth potential explains why the U.S.-German yield differential, as an indicator of exchange rate, has fallen to the back burner. Higher yields in the U.S. no longer represent a positive economic outlook but are a necessity to fund deficits. The dollar can seem to be decoupled from rates, but another way to frame it is that the U.S. needs to offer a higher premium to compensate for the policy uncertainty and seeming desire for a weaker dollar.

A potential shift in the yield differential narrative is putting the euro back in the spotlight. Market participants are bracing for a return to fundamentals—particularly rate spreads—yet the outlook may not bode well for the greenback. The European Central Bank (ECB) has delivered eight quarter-point cuts in a year, yet the euro has rallied against the U.S. dollar. From here on, the focus will be on potential Federal Reserve rate cuts. So far, Powell has held rates steady at 4.25% despite repeated calls for ultra-low borrowing costs. In other words, the rate differential is likely to widen in favor of the EUR.

Historically, the USD has offered a natural hedge to foreign investors in U.S. stocks. So naturally, as the positive correlation between U.S. stocks and the dollar has broken, European pension funds—which account for nearly half of foreign holdings in U.S. equities—and other investors are forced to increase their FX hedging to protect portfolio returns against dollar weakness. This FX hedging strategy could continue to propel the euro higher in the near term. To hedge against this currency risk, the fund might consider hedging part of that investment by taking short bets on the dollar via forwards, futures or options, adding to the dollar's bearish momentum.

As macro narratives shift toward potential U.S. Fed easing and hedging dynamics exert pressure on the greenback, EUR/USD may remain buoyant despite eurozone growth headwinds. The euro's surprising rally is forcing global investors to rethink their dollar bets, with increased FX hedging by European investors expected to continue supporting the euro against the dollar.