The euro’s recent rise to $1.20 against the U.S. dollar has refocused attention on the European Central Bank (ECB), yet economists tracking the move say it is unlikely to force prompt action from policymakers.
Exchange-rate data cited by Capital Economics show last week’s move marked the single currency’s first return to $1.20 since mid-2021. The speed of that appreciation has been notable: over a 10-day window, gains of this size have occurred only a handful of times in the past decade. At the same time, the euro’s trade-weighted exchange rate has climbed to an all-time high, according to the same analysis.
Despite the pace and scale of the rally, the expected effect on euro-area inflation is modest. Capital Economics points to sensitivity analysis published alongside the ECB’s own forecasts indicating that, if the euro were to remain at its current level against the dollar, headline inflation would be around 0.1 percentage points lower next year than the ECB projected in its December forecasts.
That downward shift in projected inflation slightly increases downside risks to price growth, but it is far from sufficient to justify intervention in foreign exchange markets on the grounds of protecting price stability, the brokerage concluded.
ECB officials are anticipated to discuss currency developments at their meeting next week. The institution retains the legal authority to intervene in FX markets to counter disorderly conditions that could threaten price stability. Nonetheless, Capital Economics argues that the euro would need to advance substantially beyond current levels before outright FX operations would be contemplated, and even then, buying dollars on the market is viewed as very unlikely.
The bank’s track record of stepping into currency markets is limited. Capital Economics notes two historical instances of intervention: once in late 2000 and again in March 2011, both of which sought to support a stronger euro. Those operations were coordinated with other major central banks. The brokerage further observes that coordinated efforts to lower the euro today appear highly improbable given the U.S. administration’s publicly stated preference for a weaker dollar.
Senior ECB voices have so far taken a measured tone. Vice President Luis de Guindos has described levels above $1.20 as "complicated," while also calling $1.20 "perfectly acceptable." Austria’s central bank governor characterized the most recent rise against the dollar as "modest." Capital Economics expects ECB President Christine Lagarde to reiterate that the bank is closely monitoring the currency, but it does not anticipate her taking active steps to try to talk the euro down.
While immediate intervention looks unlikely, economists emphasize that a persistent and larger appreciation would have implications for monetary policy over time. According to Capital Economics, ECB analysis suggests that if the euro were to climb gradually to between $1.25 and $1.30 over the coming three years, headline inflation would be about 0.3 percentage points lower in 2028. In such a scenario, policymakers would be more inclined to rely on stronger verbal interventions and adjustments to interest-rate policy rather than turning to currency-market operations.
For now, analysts attribute much of the euro’s strength to dollar weakness rather than a marked improvement in euro-area economic momentum. That assessment reduces the immediate pressure on the ECB to respond. As Capital Economics summarizes, the central bank is likely to remain on the sidelines unless the currency’s appreciation becomes notably larger and more persistent.
Implications for markets and policymakers
The recent move highlights the sensitivity of inflation forecasts to exchange-rate shifts and illustrates the limited toolkit the ECB is likely to deploy when currency moves are judged to pose only modest risks to price stability. Policymakers face the trade-off of monitoring FX developments closely while reserving intervention for scenarios in which exchange-rate dynamics materially alter inflation prospects.