As the euro continues to strengthen, the European Union (EU) is increasingly concerned. Although the influence of the euro, which was weak against the dollar, is growing, the side effects such as deflation are also significant.
According to major foreign media reports on the 22nd (local time), the value of the euro rose by more than 11% compared to the beginning of the year, reaching $1.18. This marks the highest level in four years, and The New York Times (NYT) reported, "During the same period, the euro strengthened against other major currencies, including the Japanese yen, British pound, Canadian dollar, and Korean won."
The EU hopes that the euro can fill the gaps left by the weakening of the dollar's dominance. Christine Lagarde, President of the European Central Bank (ECB), noted last week that, "Open markets and multilateral norms are collapsing, and even the dominant role of the U.S. dollar, which was the axis of this system, is no longer certain," stating that now is the opportunity for the euro to expand its global influence.
However, voices expressing concerns about the side effects of the euro's strength are growing. First, there is the issue of low prices resulting from the strong euro. The ECB forecasts that next year's inflation rate will average 1.6%, significantly lower than the target of 2.0%.
Earlier this month, Ollie Rehn, Governor of the Bank of Finland, said, "The strength of the euro has helped achieve the inflation target of 2%," but warned that we must ensure that prices do not remain below the target for an extended period or that low inflation expectations do not become entrenched. This is because if the strength of the euro exacerbates low prices, consumer and investment sentiment may worsen again.
Luis de Guindos, ECB Vice President, stated that if the euro's value "exceeds $1.20, it will become complicated." While the market expects the ECB to keep interest rates unchanged at its monetary policy meeting on the 24th, there are also predictions that the ECB may pursue further interest rate cuts this year as the euro continues to strengthen.
The NYT reported, "After years of working to reduce inflation, the ECB now faces concerns that inflation may be too low," noting that "interest rate cuts tend to bring about currency depreciation, but the recent strength of the euro has been particularly pronounced as the ECB cut interest rates eight times in a year."
There are also concerns that the strength of the euro could impact the exports of EU corporations. Software company SAP projected that assuming no currency hedging, every 1-cent increase in the euro-dollar exchange rate could result in a decrease of 30 million euros in sales. Truck manufacturer Daimler stated that fluctuations in the euro-dollar exchange rate could have a significant impact on its financial performance.
Valentin Marinov, a currency strategist at the French bank Crédit Agricole, said, "The continued strength of the euro is likely to lead to self-destructive results."
Amid these concerns, forecasts regarding the euro's value are mixed. Analysts surveyed by Bloomberg predict that the euro will soar to $1.21 next year. Meanwhile, some strategists, including Marinov, stated that the euro may drop to $1.10 next year.