Euro Blues

Talking Down The Currency, ECB President Draghi Plays a Dangerous Game

Draghi Yellen-Reuters
Can words speak louder than action? ECB President Mario Draghi, pushing for a weaker euro, hopes to get help from U.S. Federal Reserve Chair Janet Yellen.
  • Why it matters

    Why it matters

    The ECB President Draghi holds tremendous power to direct markets. If he gets the tone right, his calls for a weaker euro could help drive up inflation and revive the euro zone’s sputtering economy.

  • Facts

    Facts

    • The euro is currently trading at $1.34 against the U.S. dollar, down from $1.40 at the start of the year.
    • ECB President Mario Draghi wants to ensure that the single currency does not appreciate, crimping exports and dampening inflation.
    • Growth in the euro zone stagnated in the second quarter of this year.
  • Audio

    Audio

  • Pdf

Mario Draghi is walking a very fine line in talking down his own currency of late. Should the European Central Bank (ECB) president succeed, he could help boost the euro zone’s fragile economy. If he goes a step too far, he risks sending the euro currency into a downward spiral just as the region is recovering from a major debt crisis.

Such is the power of a central banker – Mr Draghi’s words carry tremendous weight with international investors. Should he find the right tone, he can influence market movements in exactly the direction he wants without taking a single action. Economists call this “verbal intervention.”

Mr. Draghi has been singing a new tune for the last few months – call it the “euro blues”. The shift in tone has been carefully calibrated, but Mr. Draghi reached one of his highest notes yet last week, telling reporters that “the fundamentals for a weaker exchange rate are today much better than they were two or three months ago.”

A central banker talking down his own currency? This used to be a no-go for the ECB. Back at his monthly press conference in March, Mr. Draghi still insisted the value of the euro was “not a policy target,” though “very important for growth and price stability.” Last week, the words “not a policy target” were left out of his comments altogether.

For Commerzbank analyst Ulrich Leuchtmann, this was a clear signal. He noted that Mr. Draghi also listed a series of reasons for why the euro has weakened, making clear that “a weaker euro has at the very least become an interim goal of the ECB’s monetary policy.”

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