Infotech

European Central Bank powerless in the face of strong euro



Posted on Dec 10, 2019 2020 at 14:07Updated 10 Dec. 2020 at 18:45

“We are ready to adjust all our instruments in view of the evolution of the exchange rate. We have not closed the door to a rate cut ”, said Christine Lagarde during the press conference of the European Central Bank (ECB). “We are following developments in the exchange rate very carefully. “ Warnings without effect on the euro. It rose 0.4%, to 1.2130, and hit a high of $ 1.2160. It gained 1% against the pound and 0.5% against the yen.

Unchanged rates

The ECB has opted for the status quo on rates. A further decline would have had little impact on the euro. “Once interest rates are in negative territory and the surprise effect has worn off, their further decline generally has little impact on the currency,” says Dominic Bunning, head of European FX research at HSBC. After the introduction of this measure in their countries, Japan, Switzerland and Sweden even saw their currencies increase in the following three months. “

In June 2014, the ECB was the first major central bank to drop its rate into negative territory at -0.1%. But of the 5 rate cuts in negative territory, only the first two, in 2014, were able to push the European currency down.

Strong euro, weak dollar

The markets believe that the ECB is not in a position to reverse the upward trend of the euro-dollar but at best to slow its advance. Its rise against the greenback is all the easier as the world’s largest currency is in the grip of doubt. Since the presidential election on November 3, the US currency has lost 3%. Markets believe that with a divided Congress that blocks action by the Biden administration, the Federal Reserve (Fed) will be on the front line to kick-start growth and jobs.

Natural area

Further easing of monetary policy by the Fed could lower the dollar against the euro, which will establish itself for a long time in its natural zone of evolution between 1.20 and 1.30 dollars. Over the past 17 years, the European currency has entered this zone at least once during the year, with two exceptions in 2016 and 2019, when it fell below $ 1.20. The euro also moved below this level during its first four years (1999-2004), the era of the weak euro, when it recorded its historic low ($ 0.84).

Competitiveness

The decline of the euro over the past month against emerging currencies allows its overall exchange rate (against the currencies of its trading partners) to limit its rise. “It is only 0.5% higher than the ECB’s forecast for 2021. It can therefore tolerate the rise of the euro-dollar more as long as emerging currencies continue to rise”, says Andreas Steno Larsen, head of rate and currency strategy at Nordea. This year, the euro is up only 1.3% against the Chinese currency at 7.91 renminbi. This modest appreciation will enable European exporters to benefit more from the economic recovery in China (their second largest export market) than in the United States, where the euro’s jump of nearly 8% against the dollar is much more handicapping their customers. competitiveness.

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