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Dollar extends gains after inflation expectations pick up

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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

(New throughout, updates headline, prices, first paragraph,

adds new analyst quotes)

By Chibuike Oguh and Yadarisa Shabong

NEW YORK, March 14 (Reuters) - The euro gained broadly

on Friday after German parties agreed on a fiscal deal that

could boost defence spending and revive growth in Europe's

largest economy.

The dollar weakened against the euro but rose against the

Swiss franc and the yen, underpinned by the likelihood the U.S.

government will avert a shutdown over the weekend, extending

gains as data showed inflation expectations picked up,

suggesting the Federal Reserve will likely be patient cutting

interest rates.

German Chancellor-in-waiting Friedrich Merz announced he had

secured the crucial backing of the Greens for a massive increase

in state borrowing.

The deal will likely be approved by the outgoing parliament

next week and it includes a 500 billion euro ($544.30

billion)fund for infrastructure and sweeping changes to

borrowing rules.

Dominic Bunning, head of G10 FX Strategy at Nomura, said he

sees upside for the euro especially against the Swiss franc and

against the British pound on prospects of German fiscal

spending.

"We expect the German fiscal reform to pass next week and

the ECB holding rates steady in April, a more hawkish outcome

than is currently priced in," Bunning said. "The USD leg may

remain somewhat volatile as U.S. exceptionalism fears wane but

tariffs pose some USD upside risks."

The euro rose 0.18% to $1.087025. Against the

pound, the euro gained 0.3% to 84.08 pence and rose

0.5% to 0.96255 against the Swiss franc. It is on

track for a second straight week of gains against the dollar,

pound, and the franc.

The University of Michigan survey on Friday showed that U.S.

consumer sentiment plunged in March but inflation expectations

soared amid worries about the impact of President Donald Trump's

sweeping tariffs. Consumers' 12-month inflation expectations

jumped to 4.9%, from 4.3% in February.

Top U.S. Senate Democrat Chuck Schumer announced on Thursday

that he would vote to advance a Republican stopgap funding bill,

signalling that his party would provide the votes to avert a

government shutdown.

The dollar strengthened 0.37% to 0.885 Swiss franc

and up 0.65% for the week. Against the Japanese yen,

the dollar strengthened 0.38% to 148.38 and was up 0.25% this

week.

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 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.

The pound weakened after the British economy unexpectedly

contracted by 0.1% in January. The pound, however, was not far

off its four-month peak of $1.2990 hit on Wednesday. Sterling

weakened 0.14% to $1.2928 but was up 0.10% for the

week.

On the back of the stronger euro, the dollar index,

which measures the greenback against a basket of currencies

including the yen and the euro, fell 0.11% to 103.72. It is on

track for the second straight week of losses.

"I think it's a combination of obviously the tariff stuff,

which creates a lot of noise and a lot volatility and then in

the U.S. we have an end of a regime of a lot of fiscal stimulus

with this administration trying to reduce government spending,"

said Brad Bechtel, global head of FX at Jefferies in New York.

"At the same time, we have the EU going in the opposite

direction and expanding fiscal spending by quite a lot."

($1 = 0.9186 euros)