ECB sees strong euro weighing on exports and inflation

FRANKFURT

European Central Bank policymakers are concerned that the appreciation of the euro could weigh on exports and drag inflation down further, minutes from their June meeting showed.

During the most recent gathering of the ECB's rate-setting governing council, members concluded that "higher tariffs and the recent appreciation of the euro should weigh on exports."

"Trade tensions and elevated uncertainty had clouded the outlook for the euro area economy," the minutes said.

The euro has significatively gained in value relative to the dollar since U.S. President Donald Trump began brandishing punitive tariff measures against key trading partners.

Since the beginning of February, the unit has risen from $1.04 to $1.18, a near four-year high against the dollar.

A strong euro makes exports from the eurozone more expensive and therefore less competitive compared to other producers.

The euro's rise at the same time also makes imports cheaper for the 20 countries that use the currency, slowing inflation.

ECB policymakers had this dynamic in mind as they settled on another rate cut in June, reducing the central bank's key deposit facility by a quarter-point to 2 percent.

Observers expect the ECB to hold rates at their current levels at its next meeting in late July, while the path beyond that point remains unclear.

"Driven by the stronger currency, the only question for the ECB currently seems to be when and by how much and not if to continue cutting rates," ING bank analyst Carsten Brzeski said.

The ECB's latest forecasts see inflation at two percent in 2025 and 1.6 percent in 2026, before a rebound to target in 2027.