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ECB minutes reveal concern over euro strength

The eurozone’s top central bankers are concerned about the strength of the euro, minutes of the European Central Bank’s July policy vote reveal.

The single currency has hit a two-and-a-half year high against the dollar in recent months and has risen by almost 5 per cent against a basket of currencies since the middle of May. The communication problem facing the ECB over the currency is especially acute at a time when it is looking make a decision on tapering its €2trn quantitative easing programme.

A strong euro complicates the ECB’s efforts to hit its inflation goal of just under 2 per cent by making imports cheaper and weighing on export growth. The minutes of the ECB’s July policy vote showed that policymakers believed there was a risk that the currency could rise in value again. The comments knocked the currency to its lowest point of the month.

While most of the recent gyrations in prices of financial assets were down to the region’s economic recovery, “concerns were expressed about a possible overshooting in the repricing by … markets, notably the foreign exchange markets, in the future.”

The account added: “It was underlined that the still favourable financing conditions could not be taken for granted and relied to a considerable extent on a continued high degree of monetary policy support.”

When ECB president Mario Draghi meets the press after the governing council’s next vote on September 7 he will have to explain why the bank is holding discussions on slowing down the pace of its bond buying in 2018 — while at the same time presenting forecasts for weaker inflation. A decision on tapering is expected at the council’s October meeting.

Some analysts have pointed the finger at the ECB for the euro’s ascent. The currency rose sharply after a speech delivered by Mr Draghi in Sintra in late June in which the ECB president mentioned “reflationary” forces were emerging in the eurozone economy — and again after his press conference following the July vote.

The minutes put the currency’s rise down to two factors: the removal, following the election of Emmanuel Macron as France’s president, of the political uncertainty that erupted in the wake of the Brexit vote and market expectations over US interest rates. “These two factors were now largely priced out, leaving the euro back around the levels prevailing before the UK referendum.”