Eurozone’s Falling Currency Risks Stoking Inflation

  • The falling euro could stoke hotter inflation, German Finance Minister Christian Lindner warned.
  • The European Central Bank should raise benchmark rates to prop up the currency, he added.
  • The euro is close to reaching parity with the dollar for the first time in 20 years.

German Finance Minister Christian Lindner warned the weak euro could worsen inflation and urged the European Central Bank to raise rates to strengthen the currency.

On Friday, the euro exchange rate with the dollar was hovering around $1.05, down about 7% year to date and 14% below year-ago levels. The euro is close to reaching parity with the dollar for the first time in 20 years as the

Federal Reserve

lifts rates while the ECB has yet to tighten. 

“Inflation risks [in Europe] emerge from the development of the external value of the euro, especially in view of central bank policy in the US,” Lindner told reporters on Friday. He added that inflation threatens “future economic development” that Europe desperately needs.

While a weaker currency can make a country’s exports more competitive, it makes imports more expensive, adding to inflationary pressures.

The ECB has kept key interest rates negative even as inflation runs at a 7.4% clip. Joachim Nagel, Germany’s central bank governor and member of the ECB’s rate-setting committee, suggested that the ECB could raise rates as high as 0.5 percentage points in July, which is above the expected 0.25-point hike. 

Lindner threw his full support behind such a move, and said he thinks “more steps will quickly follow.”

The euro launched in 1999 and traded below the dollar in the early years. But the euro rallied and eventually soared to a peak of roughly $1.58 in March 2008. 

Easy-money policies from the Federal Reserve helped keep the euro above the dollar, but that’s taking a hard turn in the other direction. The Fed has hiked rates by 0.75 basis points, and expectations for an aggressive cycle of continued increases have sent US bond yields surging.

That’s lifted the dollar against the euro as well as the world’s other top currencies. Russia’s war on Ukraine as well as broader market turmoil have also sent investors flocking to the safe haven of the dollar. A weakening eurozone economy is also dampening expectations for aggressive ECB rate hikes.

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