Draghi’s Watchful Eye Cools Euro Rise

The Euro has been appreciating against the US Dollar, Sterling and, notably, the Yen since last August. To a large extent, this is an overdue correction of the depreciation that the currency suffered as the European sovereign debt crisis raged. To a first approximation, the promise that the ECB would back the bonds of any EU/IMF bailout recipient nation if market interest rates became unrealistic put a firm bottom under it. Renewed confidence has seen the Euro rise by 12% against the US Dollar and by a whopping 34% against the Yen over the course of the rally. However, it is still 15 and 25%, down against the two currencies respectively, compared to its 2008 peak value.

President of the ECB, Mario Draghi, identified the Euro rally as a sign of confidence with the Eurozone. He noted that; “The exchange rate is not a policy target but it is important for growth and price stability. We will closely monitor money market developments.” His comments were taken to heart by the forex markets which saw the value of the single currency tick down by 1%.

His prognostication for economic fortunes within the Eurozone was that: “The economic weakness in the euro area is expected to prevail in the early part of 2013. Later, in 2013, economic activity should gradually recover, supported by our accommodative monetary policy stance, the improvement in financial market confidence and reduced fragmentation, as well as a strengthening of global demand.”

The ECB left interest rates unchanged at 0.75%. Draghi said that whilst business confidence was returning, it remained fragile. A stronger Euro means that exports are less competitive in importing markets but that raw material imports (and finished goods, of course) are cheaper within the Eurozone.