EUR/USD: Concerns over Euro strength and Dollar weakness – Commerzbank

European Central Banks Express Concern Over Euro's Swift Rise

Michael Pfister from Commerzbank highlights that officials at the European Central Bank (ECB) and Sweden’s Riksbank are increasingly uneasy about the Euro’s rapid strengthening, especially as the US Dollar continues to lose ground. According to Pfister, the EUR/USD exchange rate remains below its fair value when measured by purchasing power parity. As a result, the main worry is not that the Euro is overvalued, but rather the pace at which it is appreciating and the potential consequences for imported inflation.

Focus Shifts to Speed of Currency Adjustment

Pfister explains that it’s crucial to determine whether these currencies are genuinely “too strong.” Using purchasing power parity as a benchmark, he points out that, despite last year’s movements, the Euro is still undervalued relative to the US Dollar, and the Swedish krona has only partially regained its value over the past year.

He adds that European central bankers are more likely to be troubled by how quickly the Euro is rising rather than its current value. A rapid appreciation, he notes, can have a more pronounced impact on imported inflation compared to a gradual adjustment.

Ongoing Debate Likely as Dollar Weakens

Pfister anticipates that these discussions will intensify in the coming months if the US Dollar continues to weaken, as many in the market expect. However, he cautions that there are no straightforward solutions to address this trend. In fact, European policymakers have probably not objected to a stronger US Dollar in recent years.

He also remarks that if this trend reverses, USD-driven exchange rates would likely reflect fairer values, which would coincide with the appreciation of other currencies. Therefore, when central bankers voice concerns about a supposedly strong currency, it’s important to keep this context in mind.

(This article was produced with the assistance of artificial intelligence and reviewed by an editor.)