The ECB meeting last week was closely watched by Euro traders. For the first time in quite a while, the ECB decided to include the exchange rate in its statement.
The G10 countries have an unwritten agreement of not mentioning the exchange rate when it comes to setting the monetary policy. As such, every time a central bank member of a G10 country was asked about the level of the exchange rate, the proper answer was “no comment”.
However this changed, and, to the surprise of many, the ECB intervened as the EURUSD reached 1.20.
The Effects of a Strong Currency
A strong currency reflects the economic growth (strength) of a country/region. If the central bank does its job (i.e., fulfills its mandate) and sets the interest rate level based on its mandate, the currency’s strength mirrors the economic strength.
However a currency must have a comparison term – a benchmark. In this case, another currency. The currency pairs part of the FX dashboard tell a different story than just one currency does. As such, the ECB complained not about the Euro strength, but about the EURUSD rate. The EURUSD exchange rate is a problem, and not the strength of the Euro overall.
Ever since Trump won the White House four years ago, he complained about the strong dollar. Up until Trump, the “strong dollar policy” was the norm every time when the Treasury mentioned the dollar. Just like the “no comment” agreement between the G10 countries.
By the time the pandemic reached the United States, the Fed eased like never before. It dropped the rates to the lower boundary and vowed to keep them there for quite some time. It even altered its mandate, focusing more on the inflation part of it, to the detriment of the employment component.
Nobody wants a strong currency for the simple reason that it makes a country’s products and services more expensive. A strong currency comes at the expense of declining exports, directly affecting the current account of a country or region. Hence, a lower currency, especially in a time of crisis, is desirable.
For the time being, the 1.20 level seems to be the “intervention” level for the ECB. It is not the first time it intervened verbally when the EURUSD reached 1.20. It will not be the last time either.