For a modern central bank, targeting the value of your currency is considered gauche. Even so, European Central Bank President Mario Draghi let it be known at a press conference today that he finds the euro uncomfortably strong, which immediately knocked about one cent off the euro’s value against the dollar.
According to central banking etiquette, it’s OK to adopt monetary policies for the good of your domestic economy, even if they happen to affect the foreign exchange value of your currency. What’s not so cool is driving down your currency’s value for the sole purpose of gaining a competitive edge against trading partners. That’s “beggar thy neighbor.”
Draghi today was careful to say that “the exchange rate is not a policy target,” then added that it is also “important for growth and price stability.”
In other words, if the euro gets too strong, it will hurt economic growth in the 17-nation euro zone and increase the risk of too-low inflation or even deflation. Those are legitimate concerns. And Draghi’s remarks come against a background of international agitation about a possible currency war, with Japan most often fingered as the instigator, as Bloomberg Businessweek reported recently.
The euro was close to $1.36 before the press conference. It dropped to a little over $1.34. That’s still a high level for an economic zone battered by slow growth, high unemployment, and a simmering debt crisis.
Draghi, by subtly talking down the euro, is trying to combat the side effects of his own success. Last summer the euro dipped below $1.21 as the world worried that the euro zone debt crisis was spiraling out of control. Draghi vowed to save the currency “whatever it takes.” That calmed the crisis. It also made the euro’s value rise, harming Europe’s competitiveness. Or, in Italian, it led to conseguenze indesiderate—unintended consequences.