ECB should focus on the dollar-euro exchange rate
Lena Dräger, Research Director of the Monetary Macroeconomics Group at the Kiel Institute for the World Economy, comments on the European Central Bank's (ECB) expected decision to leave its key interest rate unchanged today:
"The dollar-euro exchange rate is currently more in focus than the ECB's key interest rate. While an adjustment of the key interest rate does not seem necessary at present due to stable inflation, a temporary stabilization of the exchange rate would support both the inflation rate and economic growth in the euro area. The mark of 1.20 US dollar per euro, which was recently exceeded, is considered the threshold above which the effects of the euro's appreciation have a stronger impact on economic development in the eurozone. The export-oriented German economy in particular is suffering from a strong euro, while at the same time cheaper imports could push inflation rate in the euro area below the inflation target.
In this situation, the ECB should consider intervening in the foreign exchange market to keep the 1.20 USD per euro mark as the upper limit. In order to avoid further effects on liquidity in the eurozone, the transactions should be offset by countervailing securities transactions. If necessary, coordination with the Swiss National Bank would be advisable, as the Swiss franc has also appreciated against the US dollar. This would prevent distortions in the euro-franc exchange rate."
