The euro traded at $1.1123 this morning. Is that too low an exchange rate? President Donald Trump thinks so.
He has accused the European Central Bank (ECB) of deliberately low-balling the single currency to help euro-zone exporters take a bigger share of export markets.
A lower euro makes European goods more competitive in foreign exchange markets because they are cheaper when priced in local currencies.
Interest rates go separate ways
The euro has certainly declined against the dollar during the last 12 months – on 30 July 2018, it stood at $1.1706. During that period, it high was as long ago as 20 September it stood at $1.1777, while its current value is its 12-monthly low, suggesting the momentum is behind a decline in the single currency’s dollar value.
But does this mean the ECB is deliberately manipulating the currency downwards? Defenders of the bank point to the discrepancy between US interest rates, which have been rising, and those of the euro-zone, which are at tock bottom, as an explanation for euro weakness.
Mr Trump has taken a different view. Last month, he tweeted that ECB president Mario Draghi’s comments about a further loosening in euro-zone monetary policy had caused a continuing slide in the euro against the dollar “making it unfairly easier for them to compete against the USA”, adding that Brussels had been “getting away with this for years”.
In a linked but separate salvo from Washington on the currency front, the Treasury Department in May singled out Germany, Italy and Ireland as “currency manipulators”, prompting the immediate question as to how this could be, given none of these countries has its own currency, all being members of the euro.
Regarding Germany, the Treasury said it “has the world’s largest current-account surplus in nominal dollar terms, $298 billion over the four quarters through December 2018”.
“The first promise”
A number of different issues seem to have become entangled with regard to Germany. One is the “exit rate” at which its former currency, the mark, was locked into the euro in the run up to the latter’s launch in 1999. Many say this rate was set deliberately low, in order to cement in a competitive advantage for German industry.
Another is the so-called internal devaluation, under which Germany has mimicked the effect of an actual currency devaluation by depressing domestic demand, holding down wages and running a balanced budget.
Then there is the issue of the euro itself, and Mr Trump’s accusations against Mr Drahi and his colleagues. Earlier this month, these accusations were roundly rejected by Francois Villeroy de Galhau, a member of the ECB governing council, who said the bank did not have a foreign exchange strategy and was interested only in its constitutional duty to control inflation.
He said: “Price stability is the first promise that central banks must fulfil. Our goal for the euro-zone is inflation close to 2% in the mid-term. I do say a goal of price stability and not a goal of forex [foreign exchange]. Certain tweets seem to consider that it’s a forex issue, but it’s not.”