FOREX-Euro gains after German debt reform; US dollar falls

By Gertrude Chavez-Dreyfuss and Alden Bentley

NEW YORK, March 4 (Reuters) - The euro climbed to a three-month peak against the U.S. dollar on Tuesday after Germany's conservatives and Social Democrats announced proposals to set up a 500 billion euro fund for infrastructure and overhaul borrowing rules aimed at increasing defense spending.

Other currencies in Europe also rose or extended their gains, including the Swiss franc CHF=EBS, sterling GBP=D3, as well as the Norwegian NOK= and Swedish crowns SEK= on the German news at the expense of the U.S. dollar.

Friedrich Merz, leader of the CDU/CSU conservatives and likely next German chancellor, said the parliamentary group would submit a motion to the Bundestag lower house of parliament next week to amend the constitution so defense expenditure above 1% of economic output is exempt from the debt brake.

"It sends a clear signal that Germany is serious about its defense, it sends a clear signal to Ukraine and at home, it sends a clear signal that Germany is serious about infrastructure spending," said Holger Schmieding, chief economist, at Berenberg in London.

"This strengthens Europe and should underpin euro gains although there are trade risks to consider."

The euro also gained on news that the Trump administration and Ukraine plan to sign a minerals deal on Tuesday following a contentious meeting in the Oval Office on Friday between Ukrainian President Volodymyr Zelenskiy and U.S. President Donald Trump.

The euro rose to $1.0623, the highest since December 6. It was last up 1.2% at $1.0611.

Against the yen, the euro touched a two-week high, last up 1.2% at 158.64 yen EURJPY=EBS.

Trump told his advisers he wants to announce the minerals agreement during his address to Congress on Tuesday evening, three sources said, cautioning that the deal had yet to be signed and the situation could change.

The minerals deal is seen as a step towards a peace agreement between Russia and Ukraine to end the three-year old war.

It was unclear, however, if the deal has changed. The deal that was to be signed last week included no explicit security guarantees for Ukraine but gave the U.S. access to revenues from Ukraine's natural resources.

Investors also await the European Central Bank policy meeting on Thursday, with traders pricing in another 25 basis-point cut.

TARIFFS WEIGH

Still, tariffs remain front and center in the minds of curency investors. The dollar fell against most currencies as concerns about slowing growth and the impact from tariffs on the U.S. economy outweighed any potential boost from new levies on Canada, China and Mexico.

President Donald Trump's 25% tariffs on goods from Canada and Mexico took effect Tuesday, along with a doubling of duties on Chinese goods to 20%.

In response, China said it will impose additional tariffs of 10-15% on certain U.S. imports from March 10. Canada has said that retaliatory tariffs on the United States would take effect on Tuesday, and Mexico is expected to follow suit.

Prime Minister Justin Trudeau told Trump on Tuesday his tariffs on Canadian imports were "a very dumb thing to do" and said Ottawa was striking back immediately at its closest ally.

Increasingly convinced Donald Trump is acting, rather than just talking, markets are moving to factor in a slowdown in U.S. and global growth.

Former U.S. Treasury Secretary Robert Rubin, senior counselor at Centerview Partners, said at an investment conference on Tuesday that tariffs will likely have an adverse effect on inflation and an adverse effect on growth.

"I think in terms of the long run for us, I think it (tariffs) means less productivity," Rubin said. "I think there’s a new normal of irrationality" that is not going to be helpful to the U.S. economy.

Trump's address to the U.S. Congress later on Tuesday could deliver further surprises, but the most important scheduled U.S. event of the week is expected to be Friday's February nonfarm payrolls report.

That should give more insight into the economic slowing that has unsettled investors and will be a topic for the Federal Reserve as it decides whether to resume easing or stay on pause.

The U.S. dollar index =USD, which tracks the currency against six peers, was 0.9% lower than late Monday's levels hitting its lowest since December 6.

The greenback rose to a one-month high versus the Canadian currency. It last traded flat at C$1.4479 CAD=D3.

Against the Mexican peso MXN=, the dollar was also little changed at 20.676 pesos.

Sterling =D3>, meanwhile, rose to its highest since mid-December and was last up 0.7% at $1.2784.