The impact of the Coronavirus pandemic on the global economy is significant and continues to appreciate today. Increasingly, the dollar is losing value to the detriment of the euro. This situation increasingly fuels the idea of deflation in the euro zone.
The Covid has had consequences on all the economies of the world, that of the United States included. Currently, the Biden administration is trying to turn the corner to restore the country’s economic stability . In this perspective, Olivier Passet, economist at the sectoral research firm Xerfi, thinks that Americans could be tempted to bet on the current depreciation of the dollar to somewhat contain the economic shock they have suffered.
Since mid-July, the euro has improved against the dollar and is nearing an exchange rate of between 1.18 and 1.20 dollars. To be sure, check with a currency exchange office in Paris and you will realize the impact in the euro zone of this context of low inflation . Indeed, this situation reinforces the threats of a fall in prices which will undoubtedly affect the demand addressed to companies as well as employment and wages.
More clearly, an increase in the euro reduces what is called in economic jargon “imported inflation”, that is to say inflation linked to the price of purchases by companies abroad . At the same time, it constitutes a handicap for European exports to other areas. All this in a context where inflation reached a very low level (-0.2%), even if specific circumstances contributed to this.
Given the circumstances, the ECB projects a 0.3% increase in the consumer price index . However, since 2015, the euro-dollar exchange rate has been between 1.10 and 1.15 dollars, with rare exceptions. A situation that Olivier Passet apprehends as the end of a “cooperative compromise” signed in 2014 between the ECB and the Fed and relating to the ECB’s financial asset buyback program on the instructions of its then president: Mario Draghi.
This approach had signaled the end of the rise in the euro against the dollar with an exchange rate regularly questioned in France. Jerome Powell, President of the Fed, has also meant in the sense that now the US central bank is betting on an inflation target of 2% on average. For Olivier Passet, this is a decisive turning point which would bring to the fore the currency war which could even go beyond the limits of the old continent .
For the time being, the ECB remains calm and did not, following the last meeting of its Board of Governors, consider measures to contain the appreciation of the euro. Indeed, it has already released 750 billion euros in the purchase of assets and especially public debt , to combat the economic crisis caused by the pandemic.
The fact remains that the European economic authorities are keeping an eye on the course of the euro. In this sense, an ECB specialist considers that the institution does not have particular foreign exchange objectives, but closely follows developments on the foreign exchange market, in order to adjust its monetary policy as needed .
However, like the American central bank, the ECB initiated, under the impetus of its president Christine Lagarde , a strategic review of its monetary policy . The first fruits of this approach should be appreciated around the fall of 2021.