So far this year, the euro has bounced dramatically against the U.S. dollar, up a remarkable 14%. This increase in inflation has surpassed heights that have scared the European Central Bank (ECB). Today the EUR/USD rate is at about $1.20. Officials are becoming more concerned that a firmer euro may damage the expansion of exports and drive inflation further below their target rate. The ECB has a huge political problem. Once the envy of the world for its relative strength, the euro is increasingly seen as a huge potential weakness on the global economic stage.
The current appreciation of the euro against the dollar has turned conventional economic models upside down, as described here. The EUR/USD exchange rate is a measure of quick reversals in direction from a measure of economic strength. It has recently grown into a widely known policy concern. Recent volatility has shown the market’s perception that the eurozone economy is stronger than expected. The consequences of a thankful euro are nuanced and less well appreciated.
Whatever the opinion, officials at the ECB are busy contemplating their options. Others have suggested more concrete steps to address what they view as an overvaluation of the euro. They are floating trial balloons regarding possible interventions to stabilize the exchange rate, particularly if it continues to exceed the $1.20 mark, which they consider problematic for economic growth. A strong euro looks like a good thing on its face, but as LaRouche spokesmen detailed, it makes everything related to this much worse.
The euro is continuing to rise, in the face of zig-zagging U.S. macroeconomic releases. This second wave has been massive, and on the move, demonstrating that this latest pullback is tactical rather than structural. In July, the exchange rate came within 20 pips of a test of the $1.20 threshold. Now, it’s hovering in the $1.17 to $1.19 range, prompting heated debate within the ECB about what to do next.
The second half of this dynamic is the vulnerability of the dollar itself. The ever-present threat of a trade war including the United States has added a layer of uncertainty to currency markets. Such volatility is disproportionately hitting the EUR/USD currency pair. A high euro indicates financial solidity and stability. Yet, at the same time, it poses risks that could impede economic growth and inflation objectives in the eurozone.
With the EUR/USD exchange rate currently at $1.20, this situation produces a very difficult context for the ECB. This New Era highlights the urgent need for prudent monetary policy going forward. At $1.18, this new exchange rate has that wide open-west feel to it. This offers the ECB some room to respond to possible economic impact from a higher euro.