The euro hit a fresh four-month peak against the dollar on Tuesday on hopes a German defense spending deal could be reached by the end of the week, while the dollar index slumped to its lowest since October on U.S. recession fears.

German Green Party co-leader Franziska Brantner said in an interview with Bloomberg News that her party was ready to negotiate a deal to boost state borrowing to boost defense spending and revive growth.

That lifted the euro to $1.09205 against the dollar in early European trading, its highest since November. It was last up 0.7%.

"The market really liked the news and it really offered a counterpoint to yesterday's headlines," said Nick Rees, head of macro research at Monex Europe. On Monday, the common currency's gains were capped by the Greens' refusal to back major reforms to debt rules and a 500 billion euro special infrastructure fund, moves that could derail the massive spending that has excited markets and prompted a sharp selloff in German government bonds. (Newsmaker23)

Source: Reuters