Analysis: For the falling euro, ECB intervention is probably too far

A symphony of light made up of bars, lines and circles in blue and yellow, the colors of the European Union, illuminates the southern facade of the headquarters of the European Central Bank (ECB) in Frankfurt, Germany, on December 30, 2021 REUTERS/Wolfgang Rattay

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LONDON, March 9 (Reuters) – The euro’s 4% fall against the dollar and the Swiss franc in two weeks raises the question of what – if anything – the European Central Bank will do about it.

A weak euro, in normal times, would be welcomed by an export-dependent bloc that has long struggled to meet a 2% inflation target. But in an era of double-digit inflation, record energy import bills and an impending Russia-linked growth slowdown, it’s something policymakers can’t ignore.

Given that the decline is driven primarily by the reduced likelihood of an ECB interest rate hike in the near term, investors will want to see how much policymakers are willing to tolerate weaker change.

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What the ECB says is in focus after the Swiss National Bank pledged Monday to rein in the franc’s strength – while the SNB frequently intervenes to buy euros and dollars, it hasn’t intervened verbally since. 2016. read more

Analysts believe Thursday’s ECB statement could include a mention of exchange rate monitoring, a line omitted in recent months. It may also signal that rate hikes remain an option. Some even suggest the possibility of direct monetary intervention – an extremely rare event.

“ECB should intervene on EUR/USD,” is the title of a note from Deutsche Bank’s head of global monetary strategy, George Saravelos, who said the depreciation of the euro was already inflicting economic damage. through the import price channel.

“The most effective way to ease inflationary pressures in the Eurozone right now is through a stronger Euro,” Saravelos wrote, adding that “the higher Oil and Natural Gas pushes higher, the stronger the Euro decline, pushing commodities into euros even higher – a vicious inflationary spiral”.

Commodity markets have seen stunning price spikes this year, with Brent crude hitting 14-year highs around $140 a barrel or, in euros, a record high of around €128 a barrel.

oil priceseuros

Gas prices in Europe, up 150% this year, are expected to rise by another third to reach 300 euros per megawatt hour.

Annual inflation in the Eurozone hit a record high of 5.8% in February, with energy inflation hitting 31%. Citi estimates that the latest Brent surge will add 0.3 percentage points to the Harmonized Index of Consumer Prices (HICP) in March-April, while gas prices will add 0.4 percentage points over the course of the month. coming year.

Saravelos does not see intervention in the foreign exchange market as the most likely outcome, although he does not rule out coordinated action involving the G7 central banks if “things get messy.”

Instead, he suggested raising interest rates to 0% from the current -0.5% and further increasing bond purchases as the most effective solution.

weighted by European exchanges


The turmoil in the foreign exchange market is worrying many central banks, with several, from Poland to South Korea, intervening to support exchange rates.

But the ECB, which has repeatedly said it is not targeting the exchange rate, has not intervened in the $6.6 trillion-a-day foreign exchange market since 2011, when it joined a concerted effort by the G7 to weaken the yen following the Fukushima disaster and earthquake.

Her last solo intervention dates back to 2000, when she led seven €10 billion euro buying campaigns to support the single currency shortly after its launch.

One of the reasons for the reluctance could be the view that the pass-through of the exchange rate to inflation may have diminished: a paper published by the ECB in September estimates the ERPT linked to the prices of imports from the outside the block around 0.3%, down from 0.8%. % in 1999.

Thus, while a 1% depreciation of the euro increases import prices by an average of 0.3% over one year, the overall HICP increases by around 0.04%, the newspaper adds.

“The current environment needs to deteriorate significantly and the currency needs to fall faster for them to intervene,” said Aaron Hurd, senior portfolio manager, currency, at State Street Global Advisors.

He estimates that the euro would have to fall to parity with the dollar – a further drop of 8% – for the ECB to intervene.

Moreover, to move the currency significantly, intervention would have to be substantial. Daily turnover in euros averaged almost $770 billion in October 2021 in London, according to a Bank of England survey.

ING Bank analysts also do not see the euro as “grossly undervalued”, attributing its fall to divergent expectations of a rate hike with the Fed and strong equity market outflows.

So for now, the ECB can simply talk about “exchange rate monitoring”, which “would introduce the idea that the ECB could consider measures to support the currency if it were to fall further”, he said. declared.

A further energy price shock could see the currency drop to 2020 lows around $1.0640, the bank added.


(1 euro = $1.0964)

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Reporting by Dhara Ranasinghe and Saikat Chatterjee, additional reporting by Jamie McGeever; Editing by Sujata Rao and Barbara Lewis

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