Home > Why The ECB Should Refrain From Commenting The Exchange Rate

Why The ECB Should Refrain From Commenting The Exchange Rate

Something which took many currency traders by surprise this summer was the ECB delivering one of its rarest verbal interventions, just at the point when the EURUSD crossed the 1.20 rate. 

There is an unwritten agreement, a gentlemen’s agreement, if you may, between the G20 countries, not to comment on exchange rates. For the ECB to try to talk down the Euro just a couple of weeks ahead of its regular meeting was not only new, but also strange.

The IMF Still Finds the Euro Undervalued

By agreeing to refrain from competitive devaluation, the G20 countries planned to avoid boosting exports and avoid current account developments at the expense of other nations. Yet, talking down your currency signals exactly the opposite.

Yes, the EURUSD exchange rate, the one Phillip Lane mentioned, did rise dramatically and in a noticeably short term. It moved from 1.06 to 1.20 in less than three months, putting pressure on an already weak inflation.

However the Euro in nominal terms barely rose more than 4% this year. This is, by far, nothing alarming – just the opposite. If we look at the current account surplus in the Euro area, driven higher by Germany and the Netherlands, we actually see a lower Euro than the current account would suggest. This is one of the reasons why the International Monetary Fund (IMF) perceives the Euro as undervalued when compared to its peers.

Perhaps the Europeans are retaliating to what is happening in the United States in the last four years. Before Trump’s presidency, the White House would never comment on the exchange rate. In fact, the mantra was that a stronger dollar policy is favored.

That changed dramatically in the last years. The Trump administration tried desperately to push the dollar lower, often with verbal intervention from the President himself.

As such, the ECB may have viewed it as an unfair playing field. If the rules are broken, then let them be broken for all parties. But if history tells us anything, such an approach is neither wise nor welcomed.

Fast forward two weeks from the moment Philip Lane commented on the rates, the ECB changed its attitude at the press conference. Indeed, it included the exchange rate in its statement, but in a way it did so in the past. Moreover, during the press conference, it refrained from engaging in discussions about the exchange rate, just pointing out that it is closely watching the Euro’s strength as it weighs on inflation.

What is curious is that Lane’s comment was in particular about the EURUSD exchange rate, not the Euro in general. It tells us that what happens on the other side of the Atlantic is closely watched by European policymakers.

Trade/invest in stocks with just $50
Invest for dividends and get payout on stocks on Ex-Dividend day
Over 11 payment methods, including PayPal
Open my Account

We use cookies to personalise content & ads, provide social media features and offer you a better experience. By continuing to browse the site or clicking "OK, Thanks" you are consenting to the use of cookies on this website.