European Central Bank keeps policy unchanged, faces questions over euro surge

Ashley Carr
January 28, 2018

European Central Bank President Mario Draghi took a swipe at the US administration, saying the euro's recent rise was partly the result of comments that contradicted an agreement not to talk currencies up or down.

Speaking in Davos, where he is attending the World Economic Forum, Mr Trump said "frankly nobody should be talking about the dollar's value" before adding he supported a strong USA currency.

"We'd still expect Draghi to repeat the warning over exaggerated exchange rate moves as that could shave off some of the upward momentum", NAB argues.

Draghi also notes that the exchange rate presents a source of uncertainty, which needs monitoring.

Like other central banks worldwide it has puzzled as higher economic growth - estimated at 2.4 percent in 2017 - and reduced unemployment have not brought faster price increases.

When asked if the Trump administration was a cause for concern, Mr Draghi said: "Several members of the European Central Bank governing council expressed concern".

The currency hit the $1.25 level against the US dollar around 2:00 p.m. London time and was on track for its biggest weekly rise since May of past year. The corresponding index is seen at 112.3 in January versus 112.5 in December.

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It has set interest rates at historic lows, offered cheap loans to banks and bought tens of billions of euros per month in bonds in a bid to pump cash through the financial system and to businesses and households.

Such growth rates are fertile ground for tighter policy but a strong euro, up around 4 percent this year, is exacerbating a battle the European Central Bank is facing in trying to get inflation up anywhere near its 2 percent target ceiling as it makes imports so much cheaper.

"I don't see any chance at all that interest rates could be raised this year", he said.

The euro rose above $1.25 for the first time since December 2014 on Thursday before slipping to $1.249 in late London trading, up 0.6 percent on the day.

"We remain confident that there will not be any key policy rate moves this year in light of Draghi's comments", said Simon Wells, chief European economist at HSBC. The advance came after the weekly EIA inventory data showed a drawdown in United States crude stockpiles for the tenth straight week.

After the close of trading on Thursday, results are expected from Intel Corp and Starbucks Corp. That gets harder to achieve when your currency moves more than 4% higher against the USA dollar in less than a month, and that becomes even harder to do if that rate of change were to continue in February and March.

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.

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