In World Economy News 26/01/2018
U.S. Treasury Secretary Steven Mnuchin broke an international agreement that rules out seeking a weaker currency to boost exports, the head of the European Central Bank said Thursday.
Mr. Mnuchin Wednesday said a weak dollar was helpful for trade, sending the euro higher against the U.S. currency. A stronger euro makes the ECB’s task of increasing the inflation rate harder because cheaper imported goods weigh on prices.
In Thursday afternoon trading in Europe, the euro was up 0.9%, passing $1.25 for the first time in more than three years.
In a news conference, ECB President Mario Draghi said some of the euro’s rapid appreciation this year is because of an improved outlook for economic growth.
But he also said some of the currency’s gains have been due to “the use of language that doesn’t reflect the terms of reference that have been agreed.” Mr. Draghi didn’t identify Mr. Mnuchin by name, but appeared to have the U.S. official in mind.
Mr. Draghi said the comments in question breached a longstanding agreement among international policy makers, and reaffirmed as recently as October 2017. He quoted that agreement to the effect that participating nations, including the U.S., pledge to “refrain from competitive devaluations, and will not target our exchange rates for competitive purposes.”
He said Mr. Mnuchin’s comments added to growing worries among the central bank’s policy makers about future relations between the world’s major economies.
“Several members expressed concern,” he said. “This concern was broader than simply the exchange rate. It was about the overall status of international relations right now.”
The international agreement Mr. Draghi cited is intended to prevent the outbreak of so-called “currency wars,” in which countries try to outdo each other in weakening their currencies so as to gain an economic advantage.
“President Draghi objected forcefully to U.S. Treasury Secretary Steve Mnuchin’s comments in Davos this week saying that a weak dollar is good for the U.S.–Draghi emphasized the importance of a mutual commitment against competitive devaluation,” said Bill Adams, an economist at PNC Financial Services Group. “Put simply, Draghi is warning that foreign countries could follow the U.S. in a race to the bottom if the U.S. tries to devalue the dollar.”
The ECB left its policy mix unchanged on Thursday, rejecting an early move to scale back its large monetary stimulus amid lingering concerns over weak inflation and a surging euro.
“The recent volatility in exchange rates represents a source of uncertainty which requires monitoring with regard to its possible implications for the outlook for price stability,” Mr. Draghi said.
In a policy statement, the ECB said it would continue to buy EUR30 billion ($37.2 billion) a month of eurozone bonds through September, “or beyond if necessary,” and that its key interest rates wouldn’t rise “for an extended period of time.”
The world’s No. 2 central bank has started to unwind its easy-money policies as the eurozone economy heats up, following the Federal Reserve on the path toward higher interest rates. But the ECB’s confidence is tempered by concerns about possible economic headwinds, not least from the common currency, which has risen to its highest level against the dollar in more than three years.
The ECB’s caution mimics that of the Bank of Japan, whose Governor Haruhiko Kuroda this week sought to damp market speculation that the bank was about to scale back its stimulus.
The nuances around QE matter to investors because they affect how quickly the ECB might start to raise its key interest rates, which in turn affect a wide range of bond prices and market interest rates.
Major central banks have moved in concert in recent months to unwind their aggressive stimulus policies amid a rare synchronized upswing in global growth. The International Monetary Fund this week raised its forecast for world economic growth in 2018 and 2019, arguing that sweeping U.S. tax cuts were likely to boost the world’s largest economy and its trading partners.
In a nod to the brighter outlook, the ECB halved the pace of its bond purchases this month. But the bank hasn’t yet signaled when QE will end, sparking a dispute within its rate-setting committee as some top officials worry the bank isn’t adapting quickly enough to the booming economy.
Officials are weighing a fresh move early this year to reduce their stimulus, according to the minutes of their December meeting. Specifically, the ECB might soften its pledge to continue QE until inflation reaches its target of just below 2%.
Still, risks remain. Officials worried at their December meeting about a possible repricing in global financial markets–“in particular bond markets, but also equity and corporate credit markets.”
Germany is still without a government, while Italians face national elections in March in which Beppe Grillo’s 5 Star Movement is expected to emerge as the largest party.
Source: Dow Jones
