The European Central Bank is unhappy with the U.S. dollar’s recent fall but accepts it as a natural consequence of the Federal Reserve’s cautious economic outlook and sees no reason to act to weaken the euro, three ECB sources told Reuters.
A weaker dollar – it has shed 4 percent against the euro EUR= since the beginning of March and 6 percent in the past year – is reducing imported inflation in the euro zone, making it harder for the ECB to boost prices after repeated bouts of negative inflation.
But with many big central banks easing monetary policy to stimulate sluggish economies, policymakers risk getting into costly currency wars, one ECB official said on condition of anonymity.
“We have to accept that the exchange rate channel is not working like it sed to,” said an ECB insider who asked not to be named. “With the Fed’s lowered rate path comes a weaker dollar and we need to avoid even the impression that we’re targeting the exchange rate.”
“The stronger euro doesn’t help inflation, but we’re still in a completely acceptable range and oil is finally helping us,” the source added.
The dollar, which is also trading near a 17-month low against the yen JPY=, also took a hit last month after Fed policymakers issued projections signaling that only two interest rate hikes were coming in 2016, instead of the four predicted in December.
U.S. economist Nouriel Roubini suggested on Friday the ECB was angry over a perception that the U.S. central bank has been talking down the dollar, and wanted to push for a currency accord at a meeting of the G20 major economies in Washington this week.
But conversations with central bankers and government officials suggested no such tension.
A senior Japanese finance ministry official said markets had misunderstood the G20’s Shanghai communiqué in February, as it committed to avoid intentional devaluation but did not prohibit monetary policy moves that might indirectly result in currency swings.
“I’m mildly annoyed with the currency moves, sure, but we just have to deal with it,” another ECB source said. “There was an in-principle agreement about exchange rates expressed at the G20 communiqué, but the rising risk of ‘Brexit’ and the Fed’s adjustment of its stance have both resulted in relatively big moves.”
“But the Fed is clearly devising policy for the benefit of the U.S. economy, and there isn’t a suggestion that their aim is to devalue,” that source added.
The ECB officials all denied that a complex but secret currency deal had been struck at the G20 meeting in Shanghai, and said only that there had been an intellectual understanding that trying to depreciate currencies made little sense.
The sources added that the recent jump in oil prices was helping to offset the deflationary impact of the firming euro. The ECB’s latest projections were based on a Brent crude oil price of $35.90 a barrel. Brent crude futures LCOc1 traded at just above $43 a barrel on Friday.