Only ECB Stands in the Way of Further EUR Strength

Many of the factors driving the euro exchange rate to levels that have set off alarm bells at the European Central Bank are unlikely to go away on their own, part of the reason the bank has been threatening action.

The euro is still off the peaks of 2011, but because inflation is now heading close to zero, the ECB is sensitive to its current rate because anything that makes it stronger pushes deflation nearer.

Mario Draghi, the ECB president, said at the weekend a strengthening exchange rate would trigger more policy action.

That could be some form of quantitative easing, or asset buying, to get more money into the system and hence make the euro cheaper.

Indeed, one reason for the euro’s relative strength is that central banks in the United States and Japan have been printing dollars and yen for such bond-buying programs, while the ECB’s euro balance sheet has been shrinking.

via Reuters

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