Draghi is not tempted

Mario Draghi, president of the European Central Bank (ECB), is not tempted by the strong European economy to take an advance on an interest rate hike.

Draghi said on Thursday that there will be almost certainly no rate hike this year. In doing so, he has removed the last European interest rate fears in the currency world. Despite the euro bounced rose above $3 for the first time in 1,25 years. This is mainly due to Draghi's great optimism about the European economy. Domestic demand is picking up, unemployment is falling, households' financial position is improving, corporate profits are on the rise and house prices are rising.

Hear what we want to hear
Although the euro's jump in value suggests otherwise, there was not all good news from the ECB. The market heard what they wanted to hear: the European economy is doing well and interest rates will not rise for the time being. In addition, there are clear indications of rising core inflation. This will rise due to a higher oil price and the improving economy. Draghi also noted that he is closely monitoring the movements of the euro. In doing so, he gives an indication that he does not intend to let too strong a currency drive into the wheels of the beautiful economic recovery that is now taking place.

The recent rally is not only the strength of the euro, but also the weakness of the dollar. The euro gained significantly more ground against the US currency on Thursday than against the British pound. That has to do with the fact that the US Secretary of the Treasury (Steven Mnuchin) told the World Economic Forum, just before Draghi's speech, that the low dollar was good for the American economy. That is a strange statement from Mnuchin for 2 different reasons.

Trend break
First of all, Mnuchin's comment underlines the trend reversal that US President Donald Trump's administration initiated last year. Since the 90s, US policymakers have been betting on a strong dollar. That would be good for the US economy in the long run. Trump and Mnuchin believe it is more important that the competitive position of American business receives a boost in the short term thanks to a weak dollar.

In addition, with his remark, Mnuchin does not seem to care about the agreement that was made in the spring of 2016; not to make statements about its own currency. At the time, the ruling would have sparked the simmering currency war. Now the European economy is in much better shape, so that the ECB can afford to allow the currency to rise a little further without hinting that interest rates may rise less quickly than market participants are counting on.

Lawrence Martins

Laurens Maartens is a currency expert at the Dutch Payment and Exchange Company (NBWM). Maartens analyzes current currency developments and also provides lectures and training in the field of currency management.

© DCA Market Intelligence. This market information is subject to copyright. It is not permitted to reproduce, distribute, disseminate or make the content available to third parties for compensation, in any form, without the express written permission of DCA Market Intelligence.