In recent days, the EUR/USD exchange rate has risen in response to reports of a potential Israeli strike on Iran’s nuclear facilities. This market reaction suggests that, in the current geopolitical climate, the euro is being perceived as a “safe haven” currency—an attribute traditionally reserved for the U.S. dollar. Interestingly, the European Central Bank (ECB) has reacted positively to the euro’s appreciation.
By design, the ECB does not usually comment on exchange rates, as currency levels are not an explicit target of its monetary policy. Exchange rate issues are formally left to market mechanisms—a stance shared by most central banks worldwide. Furthermore, G7 guidelines explicitly prohibit currency manipulation for competitive purposes. Against this backdrop, ECB President Christine Lagarde’s statement that a “strong euro is an opportunity” is a noticeable deviation from protocol and can be interpreted as a signal to the market.
In theory, a strong currency is typically a negative scenario for central banks. It reduces export competitiveness and diminishes the effectiveness of loose monetary policy. Nonetheless, President Lagarde sees upsides in the euro’s appreciation, suggesting that the 4% gain since February’s low still falls within the bounds of a moderate move. However, such a statement might be perceived by markets as an invitation for the trend to continue.
We can only speculate on the true motivation behind this stance. It might be an attempt to ease tensions with the U.S., or there may be another undisclosed intention. What is clear, however, is that this may mark the beginning of a form of “exchange rate diplomacy.”
From a monetary policy perspective, a stronger euro carries risks. It weakens imported inflation, which can lead to a further decline in price pressures—especially at a time when inflation is already low. Given the eurozone’s current economic structure and sluggish growth, this could exacerbate the challenges faced by the ECB.
Author: Łukasz Zembik, OANDA TMS
Disclaimer: The information provided in this publication is for informational purposes only. It does not constitute financial or any other form of advice, is general in nature, and is not directed toward any specific recipient. Independent advice should be sought before using this information for any purpose.
Source: ceo.com.pl
