Aurelia Butler

BERLIN (Reuters) -Germany’s main political parties were unveiling their manifestos on Tuesday, offering competing visions to lift Europe’s largest economy out of the doldrums while fighting off a far-right surge ahead of a snap election on Feb. 23.Germans will go to the polls after Chancellor Olaf Scholz’s three-way coalition collapsed last month, likely spelling the end for Germany’s most unpopular leader in modern times and the return to power of the main opposition conservatives.The election comes at a testing time for Germany. Its economy is set to shrink for a second straight year, industrial giants like Volkswagen (ETR:VOWG_p) face an existential threat from foreign rivals and political attitudes are hardening towards migrants.Data from the Ifo institute also delivered a sharp reminder of Germany’s woes on Tuesday, with business morale worsening more than expected in December as economic weaknesses become “chronic”. Details of the parties’ election manifestos have already leaked out, with the economy, welfare, migration and the war in Ukraine dominating the headlines. Campaigning has kicked into gear after Scholz lost a confidence vote on Monday, as expected. The conservative frontrunner Friedrich Merz and his Christian Democratic Union party (CDU) want cuts to income and corporation taxes and lower electricity prices as a way to boost the economy. “After three years in opposition, we are ready and able to assume government responsibility in Germany again,” Merz said at his manifesto launch. “The Chancellor asked for a vote of confidence yesterday and lost. He lost the trust of the majority of the population long ago. He has also lost the trust of investors who have been leaving Germany for several years now.”Merz’s policies have been seized on by political opponents as uncosted, though the CDU believes it can finance them through faster economic growth and cuts in some welfare payments.While signalling some openness to moderate reform, Merz has so far said he plans to stick to a constitutionally-enshrined government spending cap known as the debt brake. The tool was introduced after the 2009 financial crisis but critics say it hobbles growth by restricting borrowing and investment.Scholz’s Social Democrats (SPD) and their coalition ally the Greens want to reform the debt brake. Economy Minister Robert Habeck from the Greens accused Merz of failing to grapple with the realities facing Germany. “We have to get our infrastructure up to scratch,” Habeck said at the presentation of his party’s manifesto. “That requires a reform of the debt brake.”The SPD, battling to regain the initiative, has also proposed incentivising private investment and modernising infrastructure with an off-budget 100 billion euro fund. They plan to introduce a “Made in Germany” premium to boost investment. DIVISIONS ON UKRAINEGermany under Scholz has ramped up defence spending and become the second biggest military backer of Ukraine behind the United States. However, Merz would like to go further by equipping Kyiv with Taurus missiles, a step Scholz fears could drag Germany into direct confrontation with Russia. By contrast, the far-right Alternative for Germany (AfD), currently in second place after the conservatives in the opinion polls, wants an end to weapons deliveries to Ukraine and a resumption of good relations with Moscow.Migration is another hot button issue.Germany, which offered a warm welcome to Syrian and other refugees during the 2015 migrant crisis, has since hardened its stance and this year reintroduced border checks. Merz has pushed for migrants to be turned away at Germany’s borders and wants a third-party country to process asylum claims. More

With markets already pricing in nearly a full rate cut, attention will likely focus on the Fed’s communication regarding its future policy direction.BofA expects both the Summary of Economic Projections (SEP) and Chair Jerome Powell’s remarks at the press conference to signal a slower pace of cuts ahead, potentially indicating a pause in January if economic data aligns with expectations.The FOMC statement language is likely to remain largely unchanged, despite recent signs of stalled progress on inflation.BofA points out that the recent inflation surprises have been concentrated in goods sectors, particularly new and used cars, which the Fed may view as temporary.Housing inflation, meanwhile, appears to have stabilized at levels consistent with the Fed’s 2% target, and November PCE inflation is expected to remain subdued based on CPI and PPI trends.Within the SEP, BofA notes the focus will be on the 2025 median dot plot. In September, the median projection indicated 100 basis points of rate cuts in 2025. Given the stickiness of inflation and resilient economic activity, the bank’s strategists believe the median will move higher, signaling fewer cuts.“Despite this recent stickiness, we expect the median dots to show three cuts in 2025, two in 2026 and none in 2027. This would move the policy rate path from 2025 onwards up by 25bp, relative to the September dots,” strategists led by Mark Cabana said in a note.Recent commentary from Fed officials also suggests a reassessment of the neutral rate. Strategists anticipate the longer-run median rate will increase by 25 basis points to 3.125%. More

Wall Street is betting the US dollar will make further gains after its recent storming rally, even hitting parity with the euro, in a challenge to President-elect Donald Trump’s stated desire for a weaker currency.The dollar has soared 6.2 per cent since the start of October, its best quarter since the early stages of the Federal Reserve’s interest rate raising campaign in 2022, as markets began to expect the Republican candidate would win November’s election and implement his plans for trade tariffs and tax cuts. More than half of all major banks surveyed by the Financial Times, including Goldman Sachs, Morgan Stanley and UBS, are forecasting the dollar will rise even further next year. Deutsche Bank expects it to reach parity against the euro in 2025, having already strengthened from $1.11 at the start of October to around $1.05.As a result, many fund managers are dismissive of Trump’s chances of being able to weaken the US currency in order to help domestic industry, whatever his rhetoric may be.The idea of a weaker currency under Trump is “a bit of a pie in the sky”, said Sonal Desai, chief investment officer at Franklin Templeton Fixed Income. “It just feels like there are a bunch of contradictory factors. “Most of the policies that he’s talking about so far, which seem definitely to be front and centre, will actually be dollar positive — not dollar negative,” she added.Trump has long held the view that a strong dollar puts undue pressure on the US economy, leading to speculation about whether the incoming administration will act to try to push it lower. “We have a big currency problem,” Trump told Bloomberg Businessweek in July, pointing to the dollar’s strength against the Japanese yen and the Chinese yuan. “That’s a tremendous burden on our companies that try and sell tractors and other things to other places outside of this country,” he added.Trump’s affinity for a weaker dollar was on full display in his first term as president, when he railed against what he deemed unfair currency practices of other countries. His administration even officially labelled China a “currency manipulator” amid a trade war between the two countries.However, his pro-growth agenda and proposed tax cuts — along with his plans for high tariffs on imports from countries including Mexico, Canada and China — are widely expected to stoke domestic inflation after he takes office next month. This could lead to the Fed keeping interest rates higher for longer, which in turn could attract more foreign capital into dollar assets.“The Trump policies are definitively dollar positive,” said Ajay Rajadhyaksha, Barclays’ chair of global research. The bank expects the dollar to strengthen slightly to $1.04 against the euro by the end of next year. That presents a conundrum for the incoming administration, say analysts and investors. The mechanics of any possible solutions — for instance reining in the government’s budget deficit or drawing up a so-called Mar-a-Lago accord in which the US pressures its trading partners into engineering a dollar devaluation — would be highly challenging and could risk tarnishing the dollar’s status as the global reserve currency, they say.The next president cares about “the importance of the primacy of the dollar [and] he gets agitated when other countries talk about currencies other than the dollar for transactions”, said Eric Winograd, chief economist at AllianceBernstein.“The clearest expression of the incoming administration is [for an investor] to be long dollars, and to position for appreciation for the dollar.” Investors and strategists also largely poured cold water on the idea of a “Plaza Accord” style framework, referring to the deal clinched by the Reagan administration in 1985, which saw countries forge a multilateral agreement for foreign-exchange interventions that depreciated the dollar relative to other currencies.Mark Sobel, a former Treasury official, said supporters of a so-called “Mar-a-Lago Accord” may have “woefully exaggerated perceptions about US leverage over China”, with buy-in from Beijing far from secured.“The secret sauce of the Plaza Accord was that US rates were already coming down,” said Brad Setser, a fellow at the Council on Foreign Relations and a former Treasury official under President Obama. “The macroeconomic backdrop, with interest rate differentials that favour the dollar versus the euro and the yuan, isn’t conducive to a weak dollar.”Franklin Templeton’s Desai said that while Trump could potentially lean on countries that are managing their exchange rate, he would not be able to control the dollar.“It’s not clear to me that he can actually run around screaming about how the euro is too weak against the dollar,” said Desai. “It isn’t; but more importantly, it’s another currency where the central bank doesn’t control it.”The greenback’s rally has shown signs of stalling in recent weeks, with the Dollar index currently trading at 106.8, below the more than 108 it hit late last month.But while analysts highlight that much of the impact of Trump’s presidency has already been priced in by the market, few see this as a sign that the rally is over or that the Republican’s rhetoric could push the currency lower.“He could try to jawbone the dollar,” said AllianceBernstein’s Winograd. “But at the end of the day, the fundamentals tend to win.” More

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$75 per monthComplete digital access to quality FT journalism with expert analysis from industry leaders. Pay a year upfront and save 20%.What’s included Global news & analysisExpert opinionFT App on Android & iOSFT Edit appFirstFT: the day’s biggest stories20+ curated newslettersFollow topics & set alerts with myFTFT Videos & Podcasts20 monthly gift articles to shareLex: FT’s flagship investment column15+ Premium newsletters by leading expertsFT Digital Edition: our digitised print edition More