ECB May Mind Stronger Euro Less As Global Economy Slows

ECB May Mind Stronger Euro Less As Global Economy Slows

6 April 2016, 12:38
Roberto Jacobs
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ECB May Mind Stronger Euro Less As Global Economy Slows

European Central Bank (ECB) chief Mario Draghi, first verbally started attacking Euro, back in 2014, when Euro was going strong, Euro Zone economy was weak and inflation was low, by suggesting despite Euro not being a direct policy tool but an indirect one, since it exerts its influence over inflation.

Back then Euro was attempting to breach 1.4 against Dollar, but now compared to that Euro is just around 1.13 against Dollar.

However, lower exchange rate is hardly the reason, why ECB may not mind stronger Euro much. For that we need to decide, what the benefits of weaker Euro are –

  • Euro Zone, which has current account surplus, weaker Euro works as boost for exports, making Euro Zone products more competitive in global markets.
  • Secondly, weaker Euro supports inflation via higher import cost

While headline inflation benefits from higher import price in Euro, ECB may not be looking to import inflation in the medium to longer term but look for demand driven one.

Inflation aspect is one side of the story, where we would like to stress is the first point. Latest report shows, due to weakness in global demand, demand increase via exports has hit its limit in Euro Zone. Increase in exports growth across Euro Zone, relative to global increase in imports according to research from Credit Suisse has fallen to negative.

Data from ECB shows, increase in Euro Zone demand is now being supported more by domestic demand than exports.

While ECB would prefer weaker Euro, but unlikely to go extra mile to achieve it like it did two years back.

The material has been provided by InstaForex Company - www.instaforex.com


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