European Central Bank officials are beginning—reluctantly—to voice concern that the euro’s rapid appreciation may well derail their carefully choreographed attempt to anchor inflation at that all-important 2% target.
The single currency has surged approximately 14% against the dollar this year, fuelled by waning global confidence in the United States. While this rise has so far been helpful—nudging inflation neatly toward the ECB’s stated objective—there’s now growing unease that the trend might overshoot. A stronger euro suppresses import prices, yes. Still, at a certain point, it begins to smother inflation altogether and sap the competitiveness of eurozone exports—quite the conundrum for a central bank that’s already exhausted much of its conventional ammunition.
With the euro set to notch its longest winning streak in over two decades, concerns over its strength took centre stage at the ECB’s annual retreat in Sintra, Portugal. Vice President Luis de Guindos has already fired a warning shot: anything above $1.20 “would be problematic.”
Much of the euro’s rise, of course, has less to do with Europe’s newfound economic prowess and more to do with the dollar’s global credibility crisis, fuelled by Donald Trump’s tariff tantrums and a pervasive sense that U.S. macro policy is now driven more by re-election strategies than fiscal logic. Initially, this shift was welcomed in Frankfurt—not only for its deflationary bonus but also as a geopolitical win for the euro’s global standing.
But how long can this narrative hold?
Currency traders now expect de Guindos’ pain threshold of $1.20 to be breached by 2026. I believe it could be reached in a few weeks.
The ECB’s own forecasts indicate that the euro is likely to climb steadily toward the danger zone. And despite the usual mantra that the exchange rate is just one of many factors, the sudden flurry of public commentary from normally taciturn ECB officials suggests not everyone is sleeping soundly.
Latvia’s central bank governor, Martins Kazaks, joined the chorus, noting that the exchange rate “has moved significantly this year” and that another jump “could tilt the scales” toward more easing. Markets are already pricing in a further cut to 1.75% by year-end.
Even as inflation in the eurozone stands at exactly 2%, it seems the ECB is too nervous to celebrate.
On stage in Sintra alongside Fed Chair Jerome Powell and other monetary dignitaries, ECB President Christine Lagarde predictably avoided discussing the exchange rate but cryptically suggested that 2025 “could be a pivotal year” for the dollar. “It won’t happen overnight—it never has in history—but clearly there is an issue,” she said. “Whether it’s fixable or persistent remains to be seen.” It’s not quite a pep talk for the Greenback.
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I have published three books on geopolitics, all in French. The implications for financial markets will be addressed in an upcoming book in English, Investing in the Age of Disorder, scheduled for publication in February–March 2026.
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