Article Highlights

  • Euro strength seen in focus
  • Rates, guidance kept unchanged
  • QE expected to end this year
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European Central Bank chief Mario Draghi warned on Thursday that the surge in the euro was a source of uncertainty and said the bank might have to review strategy if U.S. comments on a weak dollar lead to a change in monetary conditions.

Investors were eagerly awaiting Draghi’s comments on the euro after ECB policy-makers kept interest rates and guidance unchanged, all the more since U.S. Treasury Secretary Steve Mnuchin on Wednesday talked of the benefits of a weak dollar.

This triggered a rally in the euro to three-year highs, threatening the ECB’s policy of pushing euro zone inflation higher.

Mnuchin said at Davos this week he welcomed a weak dollar, arguing that it was good for U.S. trade, and Commerce Secretary Wilbur Ross said “U.S. troops are now coming to the ramparts” in global trade wars.

Asked at his news conference about the prospect of a global currency war, Draghi reaffirmed bank policy not to target a given exchange rate.

“We don’t target exchange rates. Exchange rates are important for growth and stability … they strengthen as the economy grows – that’s just a fact of life. We look at inflation, that is our main concern.”

But without being specific, Draghi said the euro had risen partly because of “the use of language in discussing exchange rate developments that doesn’t reflect the terms of reference that have been agreed.”

That was a reference to last October’s International Monetary Fund meeting in Washington where countries had agreed they would “refrain from competitive devaluations and … not target our exchange rates for competitive purposes.”

“If all this were to lead to an unwanted tightening of our monetary policy … then we will have to just think about our monetary policy strategy,” Draghi said, noting that several ECB Governing Council members had expressed their concerns.

The euro rose as much as 0.8 percent to $1.2515 against the dollar and euro zone government bond yields rose across the board.

Draghi also said there were “very few” chances of a rate hike from the bank this year and said inflation pressures were currently subdued but would rise in the medium term.

“They (measures of underlying inflation) are expected to rise gradually over the medium term, supported by our monetary policy measures, the continuing economic expansion, the corresponding absorption of economic slack, and rising wage growth,” he said.

Yet even as the euro zone economy roars ahead, a strong euro threatens to dampen inflation and endanger the work done by the ECB during years of over 2 trillion euros worth of stimulus.

Draghi said it was too early to say exactly what the “pass-through” was from a stronger euro to inflation, which it would naturally tend to dampen by making imports cheaper.

Earlier, in a widely expected decision, the ECB kept its key interest rate deep in negative territory, maintained a pledge to hold rates steady until well after bond buys conclude and promised to continue asset purchases until a sustained rebound in inflation.

“The Governing Council expects the key ECB interest rates to remain at their present levels for an extended period of time, and well past the horizon of the net asset purchases,” the central bank said in a statement.

Having bought more than 2 trillion euros worth of bonds over the past three years, the ECB has almost single-handedly depressed borrowing costs in the euro zone to kick start growth and lift prices. The purchases, already twice reduced, are set to run until the end of September and investors are betting on their end in the fourth quarter.

But predictions for tighter ECB policy are adding to pressure on the currency and raising market bets for a rate hike as early as December, a move seen as premature even by the most hawkish of policymakers.

Inflation is also years away from rising back to the ECB’s target of 2 percent, so Draghi can hardly afford any big currency swings.


While the euro’s gain so far has only a modest impact on inflation, the worry is that weaker economies on the bloc’s periphery would be affected by it more, a risk to an economic convergence process that restarted only recently.

Part of his holding pattern approach, Draghi also kept the bank’s guidance unchanged, maintaining a promise to continue asset buys until a sustained rebound in inflation, even after policymakers agreed in December to begin work in early 2018 to draft a new guidance.

Policymakers argued that the ECB should give up a singular focus on asset buys in the guidance and should raise the role of interest rates in policy accommodation.

Such a move would also reinforce expectations that quantitative easing would likely end this year, barring any unexpected changes in growth and inflation.