A slew of comments out of G-20 sent EURUSD tumbling in early European trade when ECB officials suggested that euro was fairly valued hinting that any appreciation in the unit would be viewed unfavorably. Bundesbank President Weidmann stated that he cannot that euro is seriously overvalued and noted that he feared politicization of FX rates. Meanwhile ECB President Mario Draghi said that exchange rate is not a policy target but is important to growth.
Both men have tried painfully to dance around the exchange rate issue while at the same time acknowledging that the rise in the EUR/USD could have a negative impact on growth in 2013. The issue of higher EUR/USD exchange rates came to the forefront yesterday after the release of very disappointing GDP numbers in the region that showed wider and steeper than expected contraction in the Eurozone. Most troubling was the decline in export growth that bodes poorly for the region as a whole.
With domestic demand sharply down in most of the EZ due to the lingering effects of the sovereign debt crisis, exports are seen as the path to growth and recovery in 2013. However, higher exchange rates make goal much harder to achieve. Complicating matters further is the fact that the ECB mandate is for monetary stability which by definition calls for stable and steady rates, therefore officials in the EZ are reduced to simply asking other G-7 members to refrain from any exchange manipulation since their own rules prevent them from taking any action on that front.
Therefore today’s carefully worded rhetoric was seen as an attempt to curb any further appreciation in the EUR/USD without actually threatening any policy actions. The EUR/USD slipped to a day’s low of .1.3310 in the wake of Mr. Draghi’s comments but has since rebounded somewhat as traders await the EZ Trade Balance data due at 10:00 GMT