SeongJoon Cho/Bloomberg

Who's Winning the Global Currency War? Not the ECB.

Measured against its biggest trading partners, the euro is now at its strongest in a year

The euro is now at its highest level in over a year, and this has to be more bad news for Mario Draghi.

The European Central Bank’s own calculation of the single currency’s effective exchange rate against a trade-weighted basket of 38 other currencies stood at 119.9056 on Thursday. That means that the real-world value of the euro has risen faster than the more commonly tracked exchange rate against the dollar.

Trade-weighted, the euro is at the highest level since Jan. 2, 2015, about three weeks before the ECB president officially announced his quantitative-easing program. Just measured against the greenback, the single currency is at its highest level in more than three months.

"Having succeeded in bringing the euro down sharply last year, the ECB has recently fallen behind in the race among global policymakers to weaken their currencies in order to boost growth and stave off deflation," Jonathan Loynes, an economist at Capital Economics Ltd wrote in a note to clients on Thursday. "While the ECB has always insisted that the currency is not a policy tool, it is clear that it needs to weaken the euro again significantly in order to meet its inflation target.

Draghi has been struggling to revive inflation in the region in the face of an oil slump.

But while cheap crude is a boon for consumers and boosts economic activity, a stronger currency might put pressure on exporters and take the wind out of the region’s weak recovery.

QuickTake Currency Wars

Since June 2014, the ECB has resorted to negative rates, which can have the effect of pushing down the exchange rate. Policy makers say they don’t target the exchange rate. Markets fully price in a further cut in March, which would push the rate to minus 0.4 percent.

"They are now forced to hint at larger cuts -- potentially along with a two-tiered system for bank reserves management -- in order to put their money where their mouth is," said Frederik Ducrozet, an economist at Banque Pictet in Geneva, who tracks the gauge on a daily basis.

The ECB has recently revised the relative weights of the 38 currencies it tracks to calculate the effective exchange rate, boosting the importance of China’s renminbi.

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