Unexpected Euro Strength Raises Concerns Among Central Bank Executives
As of this week, the exchange rate of the euro against the dollar is reported at 1.1765, with an increase of nearly 14% for the year, marking its highest level since 2021 and far exceeding market expectations at the beginning of the year. Investors, facing U.S. policy uncertainties, have shifted their safe-haven funds significantly towards European assets, driving the rapid appreciation of the euro and causing concern within the European Central Bank.
At the European Central Bank Forum in Sintra, Portugal, Vice President Luis de Guindos expressed that excessive appreciation of the euro should be avoided. He stated that the current exchange rate of 1.18 is still within an acceptable range, but if it breaks through 1.20, it will complicate matters. Although the appreciation of the euro helps to lower import prices and eases local inflationary pressures, it simultaneously weakens export competitiveness, posing a risk to the export-reliant European economy.
Top Officials Express Concerns Over Export and Inflation Impact
A senior European Central Bank official revealed that the bank may need to deliver a clearer message that a too-strong euro is not welcome, or it might lead to medium-term inflation falling below the 2% target, affecting the monetary policy path. Another official also acknowledged that the strong euro might already be a potential issue.
T. Rowe Price's European Chief Economist Wieladek noted that policymakers initially expected a slow appreciation of the euro, but the current pace far exceeds expectations due to the accelerated inflow of private funds into Europe. He predicts that if the euro rises to 1.25 against the dollar, the European Central Bank might be forced to cut rates by 50 basis points to counteract deflation and economic shock.
TD Securities strategist Kumra stated that while the euro's appreciation leads to decreased import costs, it suppresses exports and has a deflationary effect, potentially returning the eurozone to the low-inflation or even deflationary period of the 2010s.
Dollar Uncertainty Boosts Euro Appreciation
Despite the U.S. Federal Reserve's policy rates being twice as high as those of the European Central Bank, which should typically attract funds back to the U.S. to strengthen the dollar, the dollar has continued to weaken this year, leading investors to turn to the euro as a safe haven, breaking traditional exchange rate logic.
European Central Bank President Christine Lagarde stated at the Sintra meeting that the dollar's uncertainty has led investors to "look for alternatives," pointing out that "certain mechanisms have been broken," though she also admitted it remains unknown whether they will be repaired. She emphasized that exchange rate factors would be considered in future forecasts, and she would maintain flexible policies to respond.
Currently, eurozone inflation remains near the 2% target, but the market expects it may fall to 1.6% next year. Continued euro appreciation combined with increased U.S. tariffs would further intensify policy pressures on the European Central Bank.
Limited Intervention Space But Differences Emerge
Although some officials are concerned about the rapid appreciation of the euro, there are also those who believe there is no need for excessive worry. Croatian Central Bank Governor Boris Vujčić stated that the current euro exchange rate is close to its level at launch, and there have been stronger movements in the past 25 years, asserting that "the current level is far from being exceptional." Fidelity fund manager Riddell argues that the EU's long-term trade surplus means the euro is justified in appreciating, and complaints about the strong euro lack persuasion.
However, a seasoned European Central Bank policymaker warned that global central banks generally do not support unilateral exchange rate intervention, as it could trigger a "currency war." Additionally, support within the Trump camp for a weaker dollar complicates the situation further. The European Central Bank will exercise caution when dealing with euro appreciation to avoid market panic.
