The Euro’s Drop Below $1 Means a More Hawkish ECB
The common currency’s decline will stoke even faster inflation. The central bank needs to defend it with more aggressive policy tightening.
Two of those euro banknotes gets you one of those dollar bills.
Photographer: Kerem Uzel/BloombergThe euro's weakness is fast becoming a problem for the European Central Bank as its decline drives it below parity to the dollar. While that threshold may just be a number, it is undeniably more than symbolic: Its breach will affect confidence in the euro zone and, for once, is driven as much by concern about Europe’s economic outlook as it is by investors seeking the haven of the greenback. The central bank needs to respond with a bigger-than-planned rate increase later this month.
The currency’s drop ought to persuade the ECB to raise official borrowing costs faster than it is currently anticipating, narrowing the interest-rate differential to other major global currencies. The Federal Reserve has raised rates by 150 basis points this year and is poised for much more tightening; more than 50 countries have raised official rates this year by at least 50 basis points. The ECB has yet to act, with its official deposit rate still negative, making it very late to the tightening party — what could turn out to have been a serious policy mistake. The euro is weaker this month versus all of the world’s major currencies.