The weakness of the euro is imposed on the ECB’s agenda

That the euro falls below parity with the dollar, [como sucedió ayer], marks a symbolic threshold for observers of the history of the single currency. For European Central Bank President Christine Lagarde, however, the currency’s weakness is both an implicit criticism of the central bank’s monetary policy and yet another source of irritation.

The current weakness of the euro can be seen first as an indication of the strength of the greenback. The US Federal Reserve has aggressively raised interest rates, and the administration of President Joe Biden embarked on massive fiscal stimulus last year.

But the relative strength of the dollar is also partly the work of the ECB. By keeping its benchmark rate low – it has been at minus 0.5% since September 2019, before the pandemic – the ECB has encouraged investors to shed euro assets in favor of higher dollar yields. And that despite the fact that inflation was skyrocketing, with 6.8% forecast for this year.

As much as it uses the official mantra that it is not targeting exchange rates, the ECB cannot ignore the current weakness. The faltering single currency is not only bad for the morale and prestige of Europe’s central bank governors and finance ministers: it also complicates the fight against inflation. A strong dollar makes dollar-denominated imports more expensive, especially energy and raw materials. Therefore, the weakness of the euro is likely to fuel divisions in the ECB over the desirable pace of rate hikes, and whether to start with a 0.25% hike on July 21, or something more aggressive.

There is an economic ray of hope: the weak euro favors exporters by making their products more competitive on world markets. But with the global economy on track to slow and supply chain issues continuing to hamper trade, that small advantage is unlikely to make life easier for the ECB.