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US dollar holds firm amid trade tensions with EU

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Yen softens after wage talks as market weighs BOJ rate

hike

timing

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Sterling weakens after UK GDP unexpectedly contracts in

January

(Updates after German debt deal report)

By Yadarisa Shabong and Brigid Riley

March 14 (Reuters) - 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% to $1.0902. Against the pound,

the euro gained 0.5% to 84.19 pence and rose 0.7% 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% at 148.715 yen.

JAPANESE WAGE HIKE

Japanese companies agreed to raise wages by 5.46% 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%

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% 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% in January.

Sterling was last down 0.1% 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% 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.