Euro rallies on hopes of German defence deal; dollar slips again

• Dollar index hits lowest since October, set for 7-day losing streak
• Euro rises to another four-month high
• Yen eases after hitting 5-month high

March 11 (Reuters) - The euro scaled a new four-month peak against the dollar on Tuesday on hopes a German defence spending deal could be struck by the end of the week, while the dollar index slipped to its lowest since October due to U.S. recession fears.

Germany's Greens Party co-leader Franziska Brantner said in an interview with Bloomberg News that her party was ready to negotiate to reach a deal for increased state borrowing to boost defence spending and revive growth.

That helped lift the euro EUR=EBS to $1.09205, its highest since November. It was last up 0.6% on the day and has gained more than 4% so far this month as Germany acts to ramp up defence spending.

"Markets very much like that news and it really offers counterpoint to yesterday's headlines," said Nick Rees, head of macro research at Monex Europe.

Euro gains were capped on Monday by the Greens' refusal to back sweeping reforms to debt rules and a special 500 billion euro infrastructure fund, a move which could derail a spending bonanza that had excited markets.

A broadly weaker dollar added to the euro's momentum.

'OVERDONE'

The dollar remained in focus after the Nasdaq .IXIC fell 4% overnight and the S&P 500 .SPX slid 2.7% on U.S. growth worries and tariff uncertainty.

"Historically, the dollar outperforms when we get a solid rise in volatility, but when the U.S. economy and U.S. equity market are the central point of concern, this is now limiting the attractiveness of the dollar," said Chris Weston, head of research at broker Pepperstone in Melbourne.

The dollar index, measuring the U.S. currency against six peers, fell to levels last seen in October. It was set for a seventh-straight day of losses. =USD

"We still think the hard data points to an economy that's slowing but it's not slowing too fast. Recession fear is very much overdone," Rees said.

"The markets have overreacted ... the dollar shouldn't really be trading this weak," he said.

As U.S. bond yields have gone down and global yields rose, the gap between 10-year U.S. and German yields DE10US10=RR has shrunk nearly 40 basis points since a week ago and the gap between U.S. and Japanese yields JP10US10=RR has fallen nearly 20 bps.

The turmoil in equities was triggered by a Trump Fox News interview, in which the president talked about a "period of transition," dashing investor bets he would back away from his aggressive policies.

The yen earlier touched a five-month peak of 146.55 per dollar JPY=EBS before losing ground to trade at 147.585.

Britain's pound GBP=D3 gained 0.4% to $1.2928, while Scandinavian currencies also saw some sharp moves.

The Swedish crown SEK=D3 firmed past the symbolic 10 crowns to the dollar level for the first time since December 2023 after Riksbank Governor Erik Thedeen said recent inflation outcomes have been slightly higher than expected.

The dollar was last down 0.4% at 10.095 crowns, while the euro steadied at 10.973 crowns. EUREK=D3

Norway's crown EURNOK=, NOK=D3 strengthened to 11.6235 per euro and 10.669 to the dollar, its strongest in five months.