European Central Bank bosses have a dire record of trying to talk down the euro — and their recent interventions are unlikely to be much more successful.
Christine Lagarde has become the latest policymaker to focus on the foreign exchange markets, telling members of the French and German parliaments this week that she was “very attentive to the appreciation of the euro”.
Central bankers usually choose their words carefully when discussing the subject, in order to avoid a currency war. There has been extra caution since the G20 group of leading countries agreed in 2013 not to target their exchange rates in search of a competitive edge.
And for the past couple of years, while the euro enjoyed a period of relative stability, the ECB has steered clear of the subject — despite accusations of currency manipulation from US president Donald Trump.
But that has changed; since March, the euro has appreciated by 11 per cent against the dollar. Some policymakers fear that could undermine the bloc’s nascent economic recovery by hurting exporters and weighing on inflation.
Philip Lane, the ECB’s chief economist, kicked off the fresh bout of jawboning earlier this month, saying that “the euro-dollar rate does matter”. His fellow ECB board member Isabel Schnabel followed up by saying she was “not worrying too much” about the euro’s rise because it was “actually a good sign” of economic confidence.
At her most recent press conference, analysts expected Ms Lagarde to signal more monetary easing, relieving upward pressure on the euro. But she underwhelmed them by only promising to “carefully assess” the exchange rate. Afterwards the euro rose.
Lena Komileva, chief economist, at G+ Economics, said there was “confusion over what the ECB wanted to achieve by bringing up the euro”.
According to a fellow ECB governing council member, Ms Lagarde faced a tricky task: “You need to give the message, but if you go too far you end up in a conflict situation and we don’t want that.”
Katharina Utermöhl, an economist at Allianz, said Ms Lagarde had been successful: “She managed to rein in market expectations that had gone too far.”
After all, by historical standards, the euro is not that high. It remains well below the $1.50-plus levels that caused alarm after the 2008 financial crisis and is only just above the $1.17 at which it was introduced in 1999.
The ECB’s most successful exchange rate intervention came in 2000, when it acted with the US Federal Reserve and other central banks to support a weak euro that had slumped to $0.87 in its first year.
Now, however, the Fed is making life more difficult for the ECB. Its recent strategic shift gives more weight to employment and is more tolerant of inflation overshooting its target.
Krishna Guha, head of global policy and central bank strategy at Evercore ISI, said the Fed’s more dovish stance risks overwhelming any ECB efforts to stop the euro from rising — a situation that echoes the fallout from the 2008 crash.
“We may be fated to replay what happened in the previous cycle, in which the Fed shifted aggressively dovish sooner and more decisively . . . than the ECB,” he said. “These exchange rate dynamics helped the Fed secure a stronger US recovery while creating an additional headwind for the ECB.”
This new phase of “beggar-thy-neighbour dollar devaluation policy” is one of the big challenges confronting Ms Lagarde, according to Melvyn Krauss, an emeritus senior fellow at the Hoover Institution of Stanford University.
If the euro keeps rising it will be increasingly hard for her to deal with, especially if the US election adds volatility to the dollar.
The potential pitfalls were clearly illustrated by Jean-Claude Trichet, one of her ECB predecessors. In 2004, after Mr Trichet warned about the euro’s “brutal and unwelcome” rise, then Fed chair Alan Greenspan piled on the pressure. In a speech in Frankfurt he warned that the US current account deficit would push dollar down further — giving the euro a fresh leg upwards.