The euro hit its highest levels in more than five months against the dollar on Tuesday, as the German parliament was set to vote on a massive surge in borrowing that could boost growth across the euro area's largest economy and the wider region.

Meanwhile, the greenback hit a two-week high against the yen as investors await the outcome of Wednesday's policy meetings from the Federal Reserve and the Bank of Japan.

The market will also be watching developments on a possible Russia-Ukraine peace deal, which would be positive for the single currency. The Kremlin said on Tuesday that presidents Vladimir Putin and Donald Trump would hold a phone call between 1300 and 1500 GMT.

German investor morale improved more than expected in March, the ZEW economic research institute said on Tuesday, reporting an increase in its economic sentiment index to 51.6 points from 26.0 points in February.

A vote in the lower house of the German parliament is expected in the afternoon after a morning debate. Should the legislation pass the Bundestag lower house, it still has to go to the Bundesrat upper house. The main hurdle to passage fell on Monday, when the Bavarian Free Voters agreed to back the plans.

The euro was down 0.05% at $1.0916, after hitting $1.0954 earlier in the session, its highest since October 10.

BofA sees the euro rising to 1.15 by the end of 2025.

"We see two main drivers for this outlook: policy uncertainty and fiscal tightening in the U.S. while Germany is about to increase its spending massively," said Athanasios Vamvakidis, global head of G10 forex strategy at BofA.

"The main near-term risk is the implementation of U.S. tariffs on April 2. Extreme tariffs (at 25%) would likely put downward pressure on the euro," he added.

Trump said he has no intention of creating exemptions on steel and aluminium tariffs and said reciprocal and

sectoral tariffs will be imposed on April 2

.

"The prospect of wider deficits in Europe has had the effect of raising Europe's sovereign yields this month and sucking flows into the euro and the British pound," said Thierry Wizman, global forex and rates strategist at Macquarie.

"Fading of 'American exceptionalism' is at the core of our outlook for forex in the medium term," he added.

SLOWDOWN FEARS

The dollar index, which measures the currency against six peers, was up 0.07% at 103.48. It hit 103.21 last week, its lowest level since October 15.

It has dropped around 6% from the more than two-year peak of 110.17 hit in mid-January.

Fears that U.S. President Donald Trump's aggressive tariff policies could trigger a broader economic slowdown have weakened the greenback amid a string of soggy sentiment surveys.

The dollar was at 149.78 against the Japanese currency , after reaching 149.91, its highest level since March 5. It hit 146.52 last week, its lowest level since October 4.

Analysts expect the Fed to hold its monetary policy stance amid persistent inflation concerns.

New economic projections from Fed officials this week will provide the most tangible evidence yet of how U.S. central bankers view the likely impact of Trump administration policies.

BOJ policymakers start their two-day meeting on Tuesday and are expected to discuss just how much of a risk the escalating U.S. trade war poses to Japan's economy.

"We would expect this adjustment in the pricing of the terminal rate to be maintained following the BoJ meeting," said Lee Hardman, senior currency analyst at MUFG, referring to market expectations that rose from around 0.90% at the end of 2024 to close to 1.20%.

Elsewhere, the Australian dollar consolidated around $0.6368 after rising to its highest in a little less than a month on Monday.

Bitcoin slipped 1.6% to $82,609.

(Reporting by Stefano Rebaudo; Editing by Shri Navaratnam, Alex Richardson and Sharon Singleton)