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Euro up, bonds in epic selloff after German debt reform

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Beijing retains growth target of 5%, lines up more

stimulus

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Oil sinks as Trump trade war escalates

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Global growth worries trigger losses for oil, Wall Street

By Kevin Buckland and Amanda Cooper

TOKYO/LONDON, March 5 (Reuters) - The dollar hit

three-month lows on Wednesday as the U.S.' trade war with its

partners escalated, while a major overhaul to German government

borrowing triggered the biggest sell-off in the country's debt

since the late 1990s.

In addition to the cocktail of tariffs and a seismic shift

in German fiscal policy, investors also parsed through the start

of China's annual sessions of its parliament, the National

People's Congress (NPC), at which Beijing retained a goal of

roughly 5% economic growth for 2025.

The euro hit its highest in four months, while

European stocks surged. The biggest casualties were

longer-dated German government bonds, caught up in their worst

one-day selloff in more than 25 years as yields ripped higher.

Overnight, German political parties agreed to a 500

billion-euro ($534.75 billion) infrastructure fund and,

crucially, an overhaul in borrowing limits that economists

billed as "a really big bazooka".

"Last night Germany announced plans for one of the largest

fiscal regime shifts in post-war history, perhaps with

reunification 35 years ago being the only rival," Deutsche Bank

strategist Jim Reid said.

"Everything you thought you knew about Germany's economic

prospects three months ago, or even three weeks ago, should be

ripped up and you should start your analysis from fresh," he

said.

German 30-year yields - the rate the government pays to

borrow over the very long term - rose by almost a quarter of a

percentage point in early trading, which would have marked their

largest rise since October 1998.

The 30-year bond was last up 15 basis points to yield

2.978%.

Longer-dated yields elsewhere rose too, with French 30-year

rates up 11 basis points at 3.963% and even U.S.

Treasury bond yields up 3.5 bps at 4.55%.

Europe's STOXX 600 jumped by more than 1% to record highs.

The prospect of a meaningful increase in European spending on

security has sent the region's defence stocks soaring this

month.

TRADE WAR INCOMING

U.S. tariffs on imports from Canada, Mexico and China went

into effect on Tuesday, when President Donald Trump also

delivered his State of the Union address, in which he touted his

successes since taking office six weeks ago.

Canada and China retaliated immediately, while Mexican

President Claudia Sheinbaum vowed to respond likewise, without

giving details.

With a full-on trade war underway, crude oil hit six-month

lows, while bitcoin found its feet around $87,800

following a volatile week.

"Fears about weaker U.S. and global economic activity are

manifesting in the markets, with cyclicals driving the

sell-off," said Kyle Rodda, senior financial markets analyst at

Capital.com.

In China, the offshore yuan was roughly steady at

7.2593, having staged its biggest daily rally the previous day

since Trump's inauguration as investors ditched the dollar.

Along with its unchanged economic growth target, Beijing

committed more fiscal resources than last year to mitigate the

impact of rising U.S. tariffs.

China aims for a budget deficit of about 4% of gross

domestic product in 2025, up from 3% in 2024.

"It doesn't look like China wants to go overboard with

spending right away, given the tariff threats, as they

potentially want to save ammunition for external threats later

in the year," Saxo chief investment strategist Charu Chanana

said.

Hong Kong's Hang Seng rallied 2.1%, and an index of

mainland blue chips rose 0.3%.

Overnight, the U.S. S&P 500 slid 1.2%, but futures

rose 0.7% on Wednesday.

The U.S. dollar index tumbled 0.4% to 105.11,

bringing its losses over the last three days to 2.23%, the most

in this timeframe since late 2022.

In the ascendant was the euro, which rose 0.5% to $1.0677,

the most since mid-November, prompting a flurry of bullish

forecasts from major investment banks.

Sterling rose 0.4% to $1.284, its highest since

early December, while the Japanese yen strengthened,

leaving the dollar down 0.25% at 149.44.

Oil fell for a third day on Wednesday, under pressure from

concern over energy demand as tit-for-tat tariffs ramp up and

from OPEC+ plans to raise output in April.

Brent futures fell 0.3% to $70.80 a barrel, having

hit $69.75 the previous day, the lowest since September.

($1 = 0.9350 euros)