The Mnuchin dollar and the Draghi euro

AS if on cue, Mario Draghi on Thursday demonstrated one consequence of the weak-dollar philosophy espoused by Steven Mnuchin on Wednesday.

Draghi indicated that the European Central Bank (ECB) he leads may delay normalising monetary policy thanks to the weak greenback favored by the US Treasury Secretary.

“The recent volatility in exchange rates represents a source of uncertainty which requires monitoring with regard to its possible implications for the outlook for price sta- bility,” Draghi told the press after the ECB’s January meeting.

As a result, the ECB will continue buying bonds worth US$38bil a month through September “or beyond if necessary,” and interest rates won’t rise “for an extended period of time.” That’s central-bank-speak for Draghi getting nervous about earlier plans to dial back his unconventional monetary policies because he’s afraid of triggering an excessive rise in the euro.

Draghi is right to worry, up to a point. Over the past year the euro has appreciated against the dollar to above US$1.25 from US$1.07 when Donald Trump took office.

That’s well short of the nearly US$1.40 in 2014 before Draghi began quantitative-easing bond purchases, but it’s still a blow to the ECB since competitive devaluation has been one of its main, though unacknowledged, goals.

Without mentioning the Treasury Secretary by name, Draghi also complained about “use of language in discussing exchange-rate developments that doesn’t reflect the terms of reference that have been agreed.” He meant an IMF communique last year in which governments including Washington promised to eschew competitive devaluation.

Now Draghi is in a pickle.

Having started down the QE road, he finds it as difficult as other central bankers to return to normal policy without spooking markets.

So he keeps delaying announcing a formal end to QE despite strong eurozone economic growth – 2.6% year-on-year as of the third quarter last year – and healthy business confidence.