Exclusive: ECB Resigned to Euro Weakness Versus Dollar, say Insiders

30 May 2022

- ECB insider: ‘This is a war that is already lost’
- ECB insider: ‘No point in fighting something that is going to happen anyway’
- ECB insider: ‘We are not going to do FX interventions’
- ECB insider: ECB won’t explicitly take any specific action because of the exchange rate
- ECB insider: ‘Parity for euro-dollar is just one figure like the others’

By David Barwick – FRANKFURT (Econostream) – A concerted attempt by the European Central Bank to support the euro via verbal intervention, let alone policymaking, is unlikely, according to three ECB insiders who spoke to Econostream recently on the subject.

All three insiders appeared to genuinely favour living up to the ECB’s mantra of not having an exchange rate target for the euro, and wanted to see the central bank concentrate on its core task, even if the euro's depreciation makes this harder. All seemed resigned to the currency’s softness vis-à-vis the US dollar, with one disputing that the pass-through to inflation was ‘that great or that quick’ anyway.

‘Certainly, the FX rate matters for inflation, but the Governing Council should always look at it from an inflation point of view and not think about the FX rate as such’, this person said. ‘We are not going to do FX interventions, but even to do monetary policy tightening and justify it clearly from an FX point of view, I don’t see it.’

This person also rejected the notion that any particular exchange rate of the euro held any special significance, calling parity ‘just one figure like the others.’

Although the euro appreciated following the blog post one week ago in which ECB President Christine Lagarde essentially confirmed rate hikes in July and September, a second insider dismissed the idea that such a reaction had been even a subordinate objective of her communication.

‘The key discussion is whether inflation expectations are anchored’, he said. ‘That is enough work already, and then everything will evolve around that.’

‘Is there a point in focusing on the exchange rate?’ he asked rhetorically. ‘This is a war that is already lost. The normalisation cycle in the US has to be far steeper and more aggressive than in the euro area, because we don’t have the same problems they have. In that regard, there is no point in fighting something that is going to happen anyway.’

‘Obviously the exchange rate will condition the policy path here, the same as when the US hikes it is transmitted through all the financial channels to rates in Europe, but if in internal discussions here anyone said this is a factor for doing this or that, that would be strange, even inappropriate’, this person said.

As with the others, this insider did not envision concerted intervention by the ECB even of a purely verbal nature. ‘We need to focus on the things that we can control’, he said.

A third insider who might be expected to be relatively inclined to talk the euro up failed to do so.

‘We won’t do anything about it in the sense that we won’t, because of the exchange rate, explicitly take a specific action’, he said. ‘Implicitly yes. But not explicitly saying, “In order to increase the exchange rate, now we...”. I don’t think this will happen.’

His reaction to the suggestion that Lagarde would at least make pointed comments at the next press conference was similarly lukewarm.

‘Frankly speaking, I’m not so sure how important such an intervention is’, he said. ‘I don’t think financial markets are heavily impacted by such statements.’ The effect would be temporary at best, he said.