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Euro's Strength Could Provoke Action From ECB

ByBenzinga
AuthorBenzinga
Published 10/30/2013, 09:50 AM
Updated 05/14/2017, 06:45 AM

The euro has been on a high recently as the US dollar fell due to expectations that the Federal Reserve will continue with its $85 billion per month bond buying plan.

The euro has been above $1.37 recently despite soft eurozone data and worries about the region's ability to maintain its modest recovery.

A strong euro has the potential to hurt European exporters by making the region's goods less competitive around the world. However, the European Central Bank has been firm in saying exchange rates are not a main target of the bank's policies.

Despite ECB President Mario Draghi's claims that the bank will not act on exchange rates, many see eurozone inflation rates as reason for the bank to intervene. Reuters reported that eurozone inflation stands at just 1.1 percent, well below the ECB's 2 percent target.

With most expecting the Federal Reserve to make no changes to its easy money policies at the close of its meeting on Wednesday, eurozone policy makers are divided over the best course of action for the common currency. Several opinions have emerged regarding the ECB's position in regard to the euro's recent strength. On one hand, the bank could intervene by either implementing another round of bank loans or an interest rate cut. On the other end of the spectrum are those who believe the ECB should sit tight and wait out the common currency's strength.

Moving forward, the ECB will likely hold steady on its policies and instead try to talk the currency down. In the past, Mario Draghi's words have been able to subdue the currency's strength. In February, Draghi was able to reverse the currency's upward momentum by saying that the ECB saw the currency's strength as a risk to inflation.

By Laura Brodbeck

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