EUR/USD: Strong Euro fears and Dollar slide – Commerzbank

Commerzbank’s Michael Pfister notes that some European central bankers, including at the ECB and Riksbank, are increasingly worried about a strong Euro as the US Dollar weakens. He argues EUR/USD still looks undervalued on purchasing power parity, so concerns focus on the speed of appreciation and its impact on imported inflation rather than valuation overreach.

Central banks fret over rapid gains

"It is therefore important to clarify whether these currencies are really trading 'too strongly'. One possible measure of this is purchasing power parity valuation. It is clear that despite last year's movement, the euro is still significantly undervalued against the US dollar, and the Swedish krona has only partially recovered from its undervaluation over the past year."

"European central bankers are therefore likely to be more concerned about the speed of the correction than the level of the valuation. In other words, the correction was too rapid. This is not entirely incomprehensible, as a rapid correction is likely to have a stronger effect on imported inflation than a slower one."

"Let's be realistic: these discussions are likely to gain further momentum in the coming months if the US dollar continues to depreciate, as we and many other market participants expect. But it should be clear to everyone that there are no easy ways to counteract this. In recent years, European central bankers have probably not been too unhappy about the US dollar appreciating."

"Correcting this movement would also mean that USD-driven exchange rates would appear to be more fairly valued – which would go hand in hand with an appreciation of the counterparty. Therefore, when central bankers complain about a supposedly strong currency, you should bear this in mind."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)