The European currency traded at $ 1.19 on Tuesday EURUSD,
about 7% up since the beginning of the year and more than 11% since March 20, round the time lockdowns were implemented across the continent.
The European currency is now at its highest level since May 2018, and was boosted last month by the European Union’s agreement on a € 750 billion ($ 820 billion) coronavirus recovery fund, financed by a joint loan. It has also risen 7% EURGBP,
against the pound sterling since the beginning of the year.
– The strengthening of the euro poses a challenge to current monetary policy. It keeps a lid on inflation, as prices of imported goods fall. But the European Central Bank has been in pain for years to reach its “below but near” annual target of 2% (its only official mandate), and, on the contrary, seeks to stimulate inflation and growth. The estimate that inflation is now at 0.4% annually.
– Furthermore, the appreciation of currency exports makes foreign markets more expensive, which may weaken the recovery in the trade-oriented European economy. To date, recovery in most European countries is mostly based on household consumption; households earn the expense after three months of forced savings, and find their way back to shops or restaurants. But the strong euro will start to hurt European companies as the economy returns to normal and world trade picks up.
The view: Officially, the ECB did not adjust the exchange rate because its officials kept repeating it. But that does not mean that it is indifferent. And the central bank’s level of discomfort tends to rise as the euro rises above the $ 1.15 mark. What is important here is that a strong currency gives ammunition to the proponents of more monetary stimulus as a rule, especially in the form of extra bond purchases – above the € 1.350 billion it already spends to combat the recession. And more monetary stimulus will also make it cheaper for governments to finance their deficits in financial markets.
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