FRANKFURT—European Central Bank President
criticized remarks by U.S. Treasury Secretary
that a weak dollar benefits U.S. trade, signaling a fresh economic policy rift between European officials and the Trump administration.
Mr. Draghi attributed some of the euro’s recent gains to “the use of language that doesn’t reflect the terms of reference that have been agreed.” He warned at a press conference that such language violated longstanding international agreements designed to prevent currency wars.
The war of words comes amid a surge in the euro currency, which has hit a three-year high against the dollar of $1.25.
That partly reflects an economic recovery in the eurozone, where Businesses and consumers are at their most ebullient in more than a decade. But a strong euro could complicate the ECB’s efforts to scale back its monetary stimulus.
Mr. Draghi didn’t identify Mr. Mnuchin by name, but he referenced the Treasury secretary’s remarks in Davos, Switzerland, on Wednesday—that a weak dollar was helpful for trade. Those comments sent the euro higher against the U.S. currency.
“The recent volatility in exchange rates represents a source of uncertainty which requires monitoring with regard to its possible implications for the outlook for price stability,” Mr. Draghi said. A stronger euro makes the ECB’s task of increasing the inflation rate harder because cheaper imported goods weigh on prices. Eurozone inflation has remained below the central bank’s target of just under 2% for five years.
The euro seesawed during Mr. Draghi’s News conference, surging before settling back to $1.2496, up around 0.7%.
“Put simply, Draghi is warning that foreign countries could follow the U.S. in a race to the bottom if the U.S. tries to devalue the dollar,” said
an economist at PNC Financial Services Group.
European officials have jousted with the Trump administration over the terms of global trade. U.S. officials have expressed a willingness to impose tariffs and break international agreements that might disadvantage the U.S. That has alarmed their international counterparts, who fear a possible trade war.
“Protectionism is not the proper answer,” German Chancellor
said at Davos on Wednesday. She called for multilateral solutions over isolationism.
Mr. Mnuchin sought to clarify his comments on Thursday, arguing that they didn’t represent a change in the U.S. position on the dollar.
The ECB left its policy mix unchanged Thursday, rejecting calls to further trim its stimulus amid lingering concerns over weak inflation and the strong euro.
The central bank has started to unwind its easy-money policies as the eurozone economy heats up, following the U.S. Federal Reserve on the path toward higher interest rates. But the ECB’s confidence is tempered by concerns about possible economic headwinds, not least from the common currency.
The ECB halved the pace of its bond purchases this month, but the bank hasn’t yet signaled when the quantitative easing will end, sparking a dispute within its rate-setting committee as some top officials worry the bank isn’t adapting quickly enough to the booming economy.
Mr. Draghi spoke glowingly of the eurozone economy Thursday, describing a robust expansion that “accelerated more than expected in the second half of 2017.”
But he stopped short of promising any policy changes that would further reduce the bank’s monetary stimulus, stressing that inflation remains too weak. ECB officials will review the outlook in March, he said.
He also disappointed some investors who have been betting that the ECB will raise interest rates in 2018. “I see very few chances at all that interest rates could be raised this year,” he said.
“Our impression is that the ECB’s pain threshold is much higher today than it was a couple of years ago, probably around $1.30…if not higher,”
an economist with Pictet Wealth Management in Geneva, said, referring to the euro’s level.
Major central banks have moved in recent months to unwind their aggressive stimulus policies amid a rare synchronized upswing in global growth. The International Monetary Fund this week raised its forecast for world economic growth in 2018 and 2019, arguing that sweeping U.S. tax cuts were likely to boost the world’s largest economy and its trading partners.
Still, risks remain for the ECB. Officials worried at their December meeting about a possible repricing in global financial markets, according to the minutes—“in particular bond markets, but also equity and corporate credit markets.”
Political uncertainty looms as well. Germany is still without a government, while Italians face national elections in March in which Beppe Grillo’s 5 Star Movement is expected to emerge as the largest party.
Source : WSJ