January’s weak dollar talk spooked ECB
US officials talking down the strong dollar set nerves on edge at the European Central Bank in January, according to the minutes of a meeting of policy-makers in January which were released yesterday.
ECB policymakers said attempts by the United States to talk down the dollar appeared to jeopardise a decades-long deal among major economies not to target exchange rates for competitive purposes.
The US dollar dropped sharply in the last week of January when Donald Trump’s Treasury Steven Mnuchin told delegates at the World Economic Forum in Davos, Switzerland, that a weak dollar helped US trade.
He later back-tracked, but the comments moved markets and rattled ECB President Mario Draghi, who warned at the time that Washington needed to stick with central bank practice of avoiding competitive devaluation.
“There was broad agreement among members that the recent volatility in the exchange rate of the euro was a source of uncertainty which required monitoring,” the January ECB minutes said.
Markets have calmed since the ECB’s meeting and US officials have also toned down their rhetoric.
While the euro is 4.5pc higher against the dollar than six months ago, it has fallen around 2pc lower from a recent peak.
Its downward drift to current levels is likely to comfort ECB policy-makers who accept some firming is justified by the Eurozone’s own positive economic run.
However, the January ECB minutes show that those attending rejected even a token change in the bank’s policy message, arguing that it was premature to signal policy normalisation.
That’s likely to be seen as a signal that interest rate rises remain a long way off.
A discussion over tweaking the bank’s stance could still start early this year, concluded the ECB’s Governing Council, which will meet next on March 8. But with inflation still not moving decisively higher, they were wary about euro volatility and keen to avoid any disorderly market reaction to a shift in stance.
The minutes suggest that rate-setters are in no hurry to adjust policy, even as markets expect the ECB’s unprecedented €2.55 trillion quantitative easing (QE) euro asset purchase programme to finally expire this year, more than three years after its launch.
The ECB has long flagged a discussion about changes in its communication stance for “early” 2018 but policymakers said they have not yet started that process.