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Simply weeks after European Central Financial institution president Christine Lagarde hailed a “international euro” second and stated the widespread forex might rival the greenback, some contained in the central financial institution are questioning if the euro’s energy might grow to be an excessive amount of of a great factor.
The euro has soared 14 per cent in opposition to the greenback in 2025 to succeed in its highest stage in almost 4 years as buyers pile into European belongings to shelter from US coverage volatility, upsetting predictions it will hit parity with the dollar this yr.
The rise got here regardless of a mounting divergence in rates of interest between the US and the a lot decrease charges in Europe, an upending of the standard market dynamics.
On the ECB’s three-day annual convention in Sintra, Portugal, its vice-president Luis de Guindos was most outspoken, telling Bloomberg TV on Tuesday that “we must always attempt to keep away from any type of overshooting”.
Whereas the ECB might look previous the present alternate fee of round $1.18, ranges past $1.20 “can be far more sophisticated”, he stated.
A stronger forex makes imports cheaper and drags down inflation, whereas gross sales overseas grow to be dearer and weigh on progress, significantly for export-dependent Europe. With the Eurozone already threatened by a commerce warfare with the US, some central bankers are uneasy.
One senior European central banker, talking on the situation of anonymity, stated the ECB may must sign extra strongly that it doesn’t like an excessively sturdy euro, because it will increase the danger of inflation undershooting targets. A second senior official stated the sturdy euro might “grow to be a problem”.
Tomasz Wieladek, chief European economist for fastened revenue at T Rowe Worth, stated ‘‘policymakers possible anticipated a gradual euro appreciation over time . . . however this isn’t what is going on in apply”.
The rise has been “too quick for consolation”, Wieladek stated, including that it was “possible as a result of personal sector portfolios are additionally pivoting to Europe and at a lot bigger velocity than anticipated”.
If the euro appreciates additional to hit $1.25 this yr — an increase of 6 per cent from the present stage — the ECB might minimize charges by half a share level to mitigate the consequences on inflation and the economic system, he stated.
Whereas the ECB has halved borrowing prices to 2 per cent since June 2024, the Fed has saved them larger at greater than twice that fee. Traditionally, larger US yields attracted capital inflows into the US, strengthening the greenback.
The stronger euro has helped to make life simpler for the ECB because it lowered fears {that a} potential commerce warfare with the US might drive up inflation within the forex bloc.
Traders had been looking for options to the greenback, as this yr’s information circulate might translate “right into a common insecurity that can be additional fuelled by extra uncertainty”, Lagarde stated in Sintra. “There may be clearly one thing that has been damaged,” she stated concerning the greenback’s weaknesses, including that it was unclear if “it’s fixable”.
Lagarde didn’t tackle the implications for ECB coverage, however pressured: “We take it under consideration for functions of our projections.”
As inflation hit the ECB’s medium-term 2 per cent goal in June, and is projected to briefly fall to 1.6 per cent subsequent yr, there may be rising unease amongst Europe’s high central bankers — particularly if the stronger euro coincides with larger US tariffs.
“A stronger euro would weigh on exports and so may be disinflationary,” stated Pooja Kumra, a charges strategist at TD Securities. “The euro space at this stage actually doesn’t need to enter the deflation period seen within the 2010s.”
The problem for the ECB is that any makes an attempt to tamper with the alternate fee might simply backfire.
“There’s a long-standing etiquette amongst international central banks that unilateral motion on the alternate fee is off-limits,” one influential policymaker instructed the Monetary Occasions.
Uncoordinated makes an attempt to tamper with forex markets are both doomed to fail or might even set off a forex warfare, they stated, including that the scenario was additional sophisticated by some Trump allies arguing in favour of a weaker greenback.
Some buyers are sanguine. Mike Riddell, a fund supervisor at Constancy Worldwide, pointed to the EU’s massive commerce surplus, which is usually a sign {that a} nation’s forex ought to respect.
“I don’t assume policymakers have a leg to face on when complaining concerning the euro being sturdy,” he added.
Boris Vujčić, governor of the Croatian central financial institution and one of many 26 members of the ECB’s governing council, was equally unfazed.
The euro is on the identical stage as when it was launched and has traded extra strongly in lots of the previous 25 years, he instructed the FT. “Present ranges are removed from being distinctive.”