ECB fears strength of euro will hit growth

European Central Bank President Mario Draghi took the wind out of the euro’s sails Thursday, describing its recent rise as a reflection of renewed confidence in the shared currency but adding that policy makers would monitor its gains for any impact on the inflation outlook, reports MarketWatch.

Currency watchers said the remarks hardly amounted to robust verbal intervention, but coupled with an emphasis on an accommodative monetary policy, were enough to knock the shared currency down a peg.

Draghi reiterated that exchange rates should reflect economic fundamentals and appeared to play down worries of a so-called currency war, and noted that the euro’s nominal and real exchange rates remained near their long-term averages.

The euro’s exchange rate isn’t a policy target, but it does affect growth and price stability, Draghi said, telling reporters the bank will “certainly want to see whether the appreciation is sustained and will alter our risk assessment” on price stability.

That was enough, however, to see the euro (US:EURUSD) drop sharply from levels seen earlier in the day. It traded at $1.3428 in recent action versus $1.3567 when the ECB earlier, as expected, left its key lending rate unchanged at 0.75%. The euro (US:EURUSD) traded late Wednesday at $1.3522. Read more on currencies.

“Draghi’s biggest challenge was to show his magic skills of verbal interventions and to talk down the euro exchange rate. He succeeded,” said Carsten Brzeski, economist at ING in Brussels.

Adding the stronger euro to the downside risks for price stability opened the door for new policy action if the euro strengthens further and starts to weigh on the growth and inflation projections, he said.

Others argued that Draghi’s remarks were relatively tepid.

“To be honest, I don’t think he said an awful lot,” said Jane Foley, senior currency strategist at Rabobank International in London.

All central bankers watch the exchange rate because it impacts inflation and competitiveness, she said. A rising currency makes exports more expensive, potentially undercutting output. So a significant rise by the currency amounts to a monetary tightening.

“Of course, he’s watching it,” Foley said.

Draghi appeared relatively unflustered by talk of global currency wars — the fear that nations will undertake actions aimed at undercutting their currencies, fostering a race to the bottom. A sharp depreciation by the Japanese yen (US:USDJPY) since last fall due to fresh deflation-fighting efforts has prompted complaints from policy makers around the world who fear exporters in their home nations will be undercut.

The ECB chief, however, emphasized that recent changes in foreign-exchange rates haven’t been “deliberate,” unlike similar incidents in the past. Instead, they’re the result of policy changes aimed at addressing economic woes within individual countries.