Euro falls after minutes show ECB concern at strength


The euro fell to its lowest level of the month on Thursday after European Central Bank policymakers showed concern that its further rise could derail the region’s recovery, a view that could make the bank tread more carefully when starting to pare back its crisis-era support.

The single currency, which had hit a two-and-a-half year high against the dollar, fell to a low of $1.1661 in afternoon trading after the concerns were revealed in the minutes of the ECB’s latest interest rate-setting meeting. It rose back to about $1.173 later in the day.

The euro has surged dramatically in recent months on the back of the region’s economic recovery, rising almost 5 per cent against a basket of currencies since the middle of May. While the euro’s rise reflects the region’s economic strength, it also creates a communication problem for the ECB as it looks to make decision on paring back its €2tn quantitative easing programme.

A strong euro complicates the ECB’s efforts to hit its inflation goal of just under 2 per cent, making imports cheaper and exports less attractive outside the region. The minutes of the central bank’s July policy vote revealed fears among members of its governing council that the currency could keep on rising.

While most of the recent gyrations in prices of financial assets were down to the stronger growth, “concerns were expressed about a possible overshooting in the repricing by . . . markets, notably the foreign exchange markets, in the future”, the minutes said.

The minutes added: “It was underlined that the still favourable financing conditions could not be taken for granted and relied to a considerable extent on a continued high degree of monetary policy support.”

Carsten Brzeski, economist at ING-DiBa, a bank, said the minutes presented a picture of “an ECB which wants to steer . . . towards tapering extremely cautiously”.

The ECB’s governing council’s next vote is on September 7, when a discussion on tapering is expected to begin. A decision on what happens to QE in 2018 is forecast for the October vote.

Mario Draghi, the bank’s president, looks set to face questions after the council’s September vote on why the ECB is holding discussions on slowing the pace of bond buying as part of QE in an environment where inflation is set to weaken.

Economists believe the strength of the euro will force the ECB staff to downgrade their projections for inflation in 2018 — though projections for the longer term may be left unchanged, with stronger growth expected to lift prices.

The ECB’s bullishness on the region’s economic prospects has helped lift the euro. The currency rose sharply after a speech delivered by Mr Draghi in Portugal in late June in which he mentioned that “reflationary” forces were emerging in the eurozone economy. It rose again after his press conference following the July vote.

The minutes put the currency’s rise down to two factors: the removal — following the election of Emmanuel Macron as France’s president — of the political uncertainty that erupted in the wake of the Brexit vote, and market expectations over US interest rates. “These two factors were now largely priced out, leaving the euro back around the levels prevailing before the UK referendum,” the minutes said.

Additional reporting by Mehreen Khan and Kate Allen in London

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