The European single currency surged yesterday to a three-year peak against the dollar as German Chancellor Angela Merkel moved closer to a new coalition government, dealers said.
The euro jumped to $1.2156, its highest level since December 2014, on news that Merkel’s conservatives have reached a “breakthrough” deal with Germany’s second biggest party, the Social Democrats, towards building a new coalition.
Elsewhere, oil prices receded after Brent crude topped $70 per barrel on Thursday for the first time in more than three years.
In Germany, meanwhile, party chiefs and their teams reached a deal in principle to start formal coalition talks that could lead in the coming months to a new government for the biggest EU economy, negotiators told AFP.
In the all-night negotiations in Berlin, Merkel and her Christian Democrats, Horst Seehofer of her Bavarian allies the CSU and Social Democrats (SPD) chief Martin Schulz hammered out a 28-page paper that will form the basis for the talks ahead.
The euro “jumped to its highest level in three years as the improving political sentiment in Germany and the upbeat comments from the ECB yesterday are fuelling the rally,” said market analyst David Madden at CMC markets UK.
The prospect of Merkel at the reins was reassuring to traders.
“Merkel is one of the biggest proponents of the eurozone project, and her ability to remain in power will be key to ensuring stability as we go forward,” said IG analyst Joshua Mahony.
Europe’s major stock markets also rose yesterday, boosted also by news of a £7bn takeover bid for British engineering giant GKN, which makes wing tips for Airbus jets.
London’s FTSE 100 gained 0.2% to 7,778.64 points, Frankfurt’s DAX 30 was up 0.3% at 13,245.03 and in Paris CAC 40 rose 0.5% to 5,517.06 at close yesterday.
GKN said it has rejected an “unsolicited” takeover bid from turnaround specialist Melrose worth €7.9bn or $9.5bn, calling it opportunistic and undervalues the company.
GKN’s share price soared more than 26%, topping the FTSE 100 risers’ board.
Wall Street’s stocks pushed to new records yesterday, with the Dow climbing 0.8% in late morning trade to close in on 25,800 points.
However shares in Facebook fell 5.4% in initial trading after the firm announced an overhaul of its news feed which will favour friends and family above other content. Its shares were down 1.1% nearing midday.
The euro had already been boosted Thursday after minutes from the European Central Bank’s December board meeting showed members were considering altering their guidance on policy in light of the eurozone’s improving economy.
That suggests policymakers are leaning towards winding down their own crisis-era stimulus programme, putting it on course to synchronise with the US Federal Reserve, which is already in the process of raising interest rates.
Meanwhile, the pound rose to its highest level since Britain voted to leave the EU in June 2016 on hopes for a so-called soft Brexit.
“The pound has rallied strongly following reports that the Spanish and Dutch finance ministers have agreed to push for a ‘soft’ Brexit,” said David Cheetham, chief market analyst at forex trader xtb.