ECB officials wonder if the euro has strengthened too much

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Only a few weeks after the president of the European Central Bank, Christine Lagarde, praised a “world Euro” moment and said that the common currency could compete with the dollar, some inside the central bank wonder if the Euro force could become too good.

The euro climbed 14% compared to the dollar in 2025 to reach its highest level in almost four years while investors accumulate in European assets to house the volatility of American policies, upsetting the predictions that it would reach parity with the greenback this year.

The increase occurred despite a divergence of assembly in interest rates between the United States and the much lower rates in Europe, an increase in the dynamics of the usual market.

At the BCE three-day annual conference in Sintra, Portugal, his vice-president Luis de Guindos was the most frank, saying Tuesday at Bloomberg TV that “we should try to avoid any kind of overvaluation”.

Although the ECB can exceed the current exchange rate of around $ 1.18, levels beyond $ 1.20 “would be much more complicated,” he said.

A stronger currency makes imports cheaper and leads to inflation, while sales abroad become more expensive and weigh on growth, especially for Europe dependent on export. With the euro area already threatened by a trade war with the United States, some central bankers are uncomfortable.

A senior European central banker, speaking of the state of anonymity, said that the ECB might need to report more strongly that it does not like a euro too strong, because it increases the risk of inflation subcontracting objectives. A second senior official said that the strong euro could “become a problem”.

Tomasz Wieladek, European chief economist for fixed income titles in T Rowe Price, said that “political decision -makers were likely to expect a slow appreciation of the euro over time. . . But that is not what is happening in practice ”.

The climb was “too fast for comfort,” said Wieladek, adding that it was “probably because private sector portfolios also pivot in Europe and a much larger speed than expected”.

If the euro appreciates more than reaching $ 1.25 this year-an increase of 6% compared to the current level-the ECB could reduce half-point rates to mitigate the effects on inflation and the economy, he said.

While the ECB has half reduced borrowing costs to 2% since June 2024, the Fed has kept them higher at more than twice this rate. Historically, higher American yields have attracted capital entries to the United States, strengthening the dollar.

The stronger euro helped make the life of the ECB easier because it reduced fears that a potential trade war with the United States could increase inflation in the currency block.

Investors were looking for alternatives to the dollar, because this year’s news flow could result in “a general lack of confidence which will still be fueled by more uncertainty,” Lagarde told Sirtra. “”There is clearly something that has been broken, “she said about the weaknesses of the dollar, adding that it was not clear if” it is repairable “.

Lagarde did not address the implications of the ECB’s policy, but underlined: “We take it into account for the purposes of our projections.”

While inflation has reached the objective of 2% in the medium term of the ECB in June and should temporarily drop to 1.6% next year, there is an increase in discomfort among the best European central bankers – especially if the higher euro coincides with higher American tariffs.

“A stronger euro would weigh on exports and can therefore be a disinflationist,” said Pooja Kumra, rate strategist at TD Securities. “The euro zone at this stage does not really want to enter the era of deflation seen in the 2010s.”

The challenge for the ECB is that any attempt to falsify the exchange rate could easily turn around.

“There is a long -standing label among the world central banks that unilateral action on the exchange rate is prohibited,” an influential decision -maker at the Financial Times told.

Non-coordinated attempts to alter money markets are ordered to fail or could even trigger a war of currency, they said, adding that the situation was still complicated by Trump allies arguing in favor of a lower dollar.

Some investors are optimistic. Mike Riddell, a Fundity International fund manager, underlined the EU’s major trade surplus, which generally indicates that the currency of a country should appreciate.

“I don’t think political decision-makers have one leg to stand when the euro is strong,” he added.

Boris Vujčić, governor of the Croatian central bank and one of the 26 members of the BCE board of directors, was just as imperturbable.

The euro is at the same level as when it has been introduced and has exchanged more strongly in the past 25 years, he told the FT. “The current levels are far from exceptional.”