The strength of the euro has increasingly attracted the attention of the European Central Bank policymakers.
On Tuesday, 26 EST, the media quoted informed officials as saying that the ECB’s policymakers agreed to study in depth the issue of the euro’s higher exchange rate against the dollar since the outbreak of the new pneumonia Epidemic last year, focusing on whether the difference between the monetary stimulus policies of the ECB and the Federal Reserve has pushed the euro stronger.
The media mentioned that ECB officials said that last week’s monetary policy meeting, the ECB’s management board mentioned that the U.S. market interest rates have climbed in recent months failed to promote the dollar’s appreciation, the dollar instead depreciated.
Some of the ECB’s policymakers last year on the strength of the euro to suppress the already negative Inflation rate back to worry about. The above research assessment could influence the ECB’s response to the euro exchange rate and could force the ECB to provide more monetary stimulus even as it acknowledges the increased risks to financial stability.
In the year 2020, the euro rose almost 9% against the dollar rising above 1.2300, the biggest annual gain since 2017, and almost 5% in just two months at the end of the year.
The yield on the 10-year U.S. Treasury note has nearly doubled since July 2020, now rising above 1%. German Treasuries, however, have hovered around -0.5% over the same period.
In December 2020, the ECB meeting decided to expand the size of the emergency anti-epidemic bond purchase program (PEPP) by €500 billion and to extend the duration of its introduction by at least nine months.
After the meeting, ECB President Lagarde said at a press conference that inflation in the euro area “remains very low” and “disappointingly low” and that negative inflation is expected to persist until early 2021. From a medium-term perspective, once the impact of the new crown epidemic subsides, demand will bring upward pressure on inflation, but the higher euro exchange rate also suppressed the inflation rate. Lagarde repeatedly mentioned that the ECB will “monitor the euro exchange rate very closely”.
After the meeting last Thursday, the ECB announced that it kept interest rates unchanged, maintaining the Time frame and scale of the asset purchase program unchanged, saying it would extend the reinvestment time for QE bond purchases after the first rate hike, and would not stop QE before the rate hike. lagarde said after the meeting that inflation is still very low, and the ECB is monitoring the impact of inflation on the exchange rate.
Lagarde reiterated that in order to ensure that inflation towards the ECB’s target level back up, may adjust all tools. The media has since pointed out that Lagarde’s comments were interpreted by some market participants as a warning, she was suggesting that if investors do not stop pushing up the euro action, the ECB may even cut interest rates.
Commerzbank commented that, as with some other central banks, because most of the local tools have been exhausted, the ECB began to explore the exchange rate as a tool of monetary policy.
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