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A few weeks after the president of the European Central Bank, Christine Lagarde, praised a moment of “global euro” and said that the common currency could rival the dollar, some within the central bank wonder if the strength of the euro could become too good.
The euro has raised 14 percent against the dollar in 2025 to reach its highest level in almost four years as investors accumulate in European assets to protect themselves from the volatility of the policy of the United States, which bothers the predictions that would affect parity with the Greenback this year.
The increase occurred despite a growing divergence in interest rates between the US and much lower rates in Europe, a change in the usual market dynamics.
In the annual three -day conference of the ECB in Sintra, Portugal, his vice president Luis de Guindos was very frank, and told Bloomberg TV on Tuesday that “we must try to avoid any type of overexion.”
While the ECB could look beyond the current exchange rate of around $ 1.18, the levels beyond $ 1.20 “would be much more complicated,” he said.
A stronger currency causes imports to be cheaper and drag inflation, while sales abroad become more expensive and weigh on growth, particularly for export -dependent Europe. With the Eurozone already threatened by a commercial war with the US, some central bankers are uncomfortable.
A senior European central banker, who spoke on condition of anonymity, said that the ECB may need to point out more strongly that he does not like an excessively strong euro, since it increases the risk of inflation that underlines the objectives. A second senior official said that the strong euro could “become a problem.”
Tomasz Wieladek, European economist chief of fixed income at the price of T Rowe, said that “policy formulators probably expected a slow appreciation of the euro over time … But this is not what is happening in practice.”
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The increase has been “too fast for comfort,” said Wieladek, added that it was “probably because private sector portfolios are also turning to Europe already a much higher speed than expected.”
If the euro can be seen even more to reach $ 1.25 this year, an increase of 6 percent from the current level, the ECB could reduce rates in half a percentage to mitigate the effects on inflation and the economy, he said.
Although the ECB has reduced in half the indebtedness costs to 2 percent since June 2024, the Fed has kept them higher by more than double that rate. Historically, the higher yields of the United States attracted capital tickets in the United States, strengthening the dollar.
The strongest euro has helped facilitate the life of the ECB, since it reduced the fears that a possible commercial war with the United States can increase inflation in the currency block.
Investors were looking for alternatives to the dollar, since this year’s news flow could be translated “into a general lack of trust that will be further driven by the greatest uncertainty,” said Lagarde in Sintra. “There is clearly something that has broken, “he said about the weaknesses of the dollar, and added that it was not clear if” it is repairable. “
Lagarde did not address the implications for the ECB policy, but emphasized: “We take it into account for the purposes of our projections.”
As inflation reached the 2 percent medium -term objective of the ECB in June, and it is projected to fall temporarily 1.6 percent next year, there is an augmented ranking between the main central bankers in Europe, especially if the strongest euro coincides with higher US tariffs.
“A stronger euro would weigh on exports and, therefore, can be uninflant,” said Pooja Kumra, TD Rate Strategist Securities. “The euro zone at this stage does not really want to enter the era of the deflation seen in the 2010 decade.”
The challenge for the ECB is that any attempt to manipulate the exchange rate could be easy.
“There is a long -standing label among the global central banks that the unilateral action on the exchange rate is outside the limits,” said an influential policy formulator to Financial Times.
The uncoordinated attempts to manipulate with the currency markets are condemned to failure or could even trigger a monetary war, they said, and added that the situation was further complicated by some Trump allies that argue in favor of a weaker dollar.
Some investors are optimistic. Mike Riddell, a Fidelity International Fund Administrator, said the Great EU commercial surplus, which is generally an indication that the currency of a country should appreciate.
“I don’t think policy formulators have a leg to stop by complaining that the euro is strong,” he added.
Boris Vujčić, governor of the Croatian Central Bank and one of the 26 members of the Governing Council of the ECB, did not flinch.
The euro is at the same level as when it was introduced and has negotiated more strongly in many of the last 25 years, he told FT. “The current levels are far from exceptional.”
