Euro's 14% Rise This Year Prompts ECB Concern Over $1.20 Threshold

European Central Bank Vice President Luis de Guindos has expressed concern over the euro's approach to a critical level above $1.20, stating that while current levels are manageable, a rapid ascent beyond this point could pose significant challenges. This warning comes as the euro has benefited from a weakening dollar, driven by tariff measures that have undermined market confidence, resulting in a nearly 14% rise this year. Guindos emphasized the importance of preventing the euro from overshooting, noting that the pace of the euro’s appreciation is a bigger concern than its current level.

During the ECB’s yearly meeting in Sintra, Portugal, Guindos stated that $1.17, or even $1.20, is not a big deal and that they can let it slide a bit. However, he added that anything above $1.20 would be much more complicated. The ECB typically avoids commenting on the euro’s value, maintaining that while the exchange rate factors into policy decisions, it doesn’t target any specific level. Guindos reaffirmed this stance, clarifying that the ECB focuses on how the exchange rate changes and includes its current level in their forecasts, but their focus is not on a specific exchange rate.

Guindos also noted that there is little risk of inflation falling significantly, and the euro’s sharp rise against the dollar is not a major concern for now. The ECB signaled a break in policy easing, even though it expects price growth to dip below its 2% target temporarily due to the strong euro and low oil prices. This indicates that raising concerns about the ultra-low inflation marks that the pre-pandemic decade could return. However, Guindos dismissed those fears, saying that the ECB is finally close to reaching its goal after many years of missing it above and below.

In an interview, Guindos speculated that the chance of falling short of the inflation target is quite small. He argued that inflation risks are balanced, and one of the main reasons why inflation will rebound to target after falling to 1.4% in the first quarter of 2026 is that the labor market is tight and unions will continue to push for significant wage hikes, maintaining compensation growth at 3%. Although he did not directly call for a halt in easing policies, he mentioned that financial investors, who have bet on just one more interest rate cut, possibly towards the end of the year, correctly heard ECB President Christine Lagarde’s message.

Guindos elaborated by saying that markets clearly grasped what the President meant when referring to a strong stance. He added that he expects markets to believe and factor in that the ECB is very close to achieving its medium-term target of sustainable 2% inflation. The euro is up 11% against the dollar in the past three months, reaching its highest level in nearly four years at $1.1632. A stronger euro might also reduce the prices of imports even more. However, Guindos, who was a former Spanish economy minister on the ECB board for the longest, said the exchange rate had not been volatile or appreciated quickly, which were two key measures in his estimation.