Euro’s Strength Threatens EU Economic Growth

European exporters are beginning to worry about the impact of a strong euro on their competitiveness in global markets.

The Euro has risen by 12% against the US dollar for the year to date in mid-August, and it could remain strong despite potential bouts of safe-haven dollar buying whenever international crises break out.

Analysts at Western Union Business Solutions in London say there is concern that the rapid appreciation of the euro could depress inflation in the eurozone and weigh on exporters. The European Central Bank will monitor this closely in case the strength of the single currency begins to deter economic growth, analysts say.

German exports fell 2.8% in June, which was their biggest decline in nearly two years. Industrial production in the European Union declined 0.6% in June from May. A single months’ data won’t be enough to alter the ECB’s long-term plans, but if economic weakness continues, the central bank may have to maintain quantitative easing for longer than it would like. The euro’s strength, which lowers the cost of imports, is also making it more difficult for the ECB to reach its 2% inflation target.

Despite the euro trading at a two-and-a-half year high against the dollar in August, ECB president Mario Draghi appeared unflustered by the currency’s appreciation. He argued that the negative impact on exporters would be offset, at least to some extent, by continued improvement in the global economy.

Germany’s exports to Asia have risen sharply this year, particularly to China and India, as well as Southeast Asia. US President Donald Trump has repeatedly criticized Germany for its large trade surplus with the US. Fears of rising US protectionism have outweighed concerns about the strong euro for many European exporters.

Meanwhile, the US economy could be boosted by the weak dollar, particularly at a time when inflation doesn’t appear to be a threat. A smaller than expected improvement in inflation in July (reported in mid-August) unleashed a wave of dollar selling, says Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington. US consumer prices rose at a 1.7% annual rate in July, a whisker below forecasts of 1.8%. “At best, the data points to falling inflation hitting a bottom, but at worst it could buy the Federal Reserve more time to leave interest rates low, which is bad for the dollar’s appeal,” Manimbo says.

The danger for the dollar, he says, is that soft inflation could eclipse the optimism from the July employment report, which showed that the US economy added more than 200,000 new jobs for the second straight month. Any delay in Fed tightening could leave the dollar vulnerable to further declines, Manimbo says.

President Trump appears to favor a weak dollar in his public comments, citing the boost it provides to economic growth as US companies sell more overseas. US exports in June were up 7% from a year earlier. The weak dollar also increases the value of earnings that multinational companies make in foreign currencies, once these earnings are repatriated.