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ECB warns that strong euro could undermine inflation goals

The European currency keeps rising and surprising analysts and economists alike, but there are hidden pitfalls that worry ECB officials. They fear the euro’s rapid appreciation could derail plans to stabilize inflation at 2%. It is such a contradictory currency!

This year, the euro has gained nearly 14% against the dollar amid waning confidence in the US. The risk is that further strengthening will push the single currency to levels where inflation begins to decline noticeably. As a result, European export competitiveness would suffer, experts warn.

According to specialists, the euro now stands on the brink of its longest stretch of gains in the past 20 years. The issue dominated the ECB’s annual meeting in Sintra, Portugal. During the gathering, ECB Vice President Luis de Guindos cautioned that a breakout above $1.20 would be problematic for Europe’s economy.

Preliminary forecasts suggest the euro could reach $1.20–$1.25 in 2026. ECB Chief Economist Philip Lane emphasized that European and global investors were increasingly reallocating their portfolios toward the euro, noting that while the current trend appeared sustainable, it would be important to understand how it might evolve in the future.

Latvia’s central bank governor, Mārtiņš Kazāks, also joined the discussion. Kazāks added that the euro’s exchange rate had risen markedly in 2025, a development likely to put downward pressure on inflation. He warned that if the currency continued to appreciate, it could further dampen prices and exports, potentially forcing the ECB to consider an additional rate cut.

A question about the euro’s rally was also addressed to ECB President Christine Lagarde. She declined to comment directly on the exchange rate but noted that 2025 could become a turning point for the dollar. She concluded that such shifts do not occur overnight and have never done so historically. “There is clearly something that has been broken,” she said about the dollar’s weaknesses. The key question is whether the situation is “fixable” or will persist.

Since its launch in 1999, the euro’s average exchange rate has been $1.1829. On July 1, the currency was trading just below this mark. Amid the prevailing anxiety, some voices have called for calm. Among these optimists is Bundesbank President Joachim Nagel, who acknowledges the euro’s impact on inflation but says it is not as significant as previously assumed. Joachim Nagel emphasized that the central bank was taking into account the entire range of forces pushing prices higher or lower, stressing that it was essential to consider the euro’s situation within a broader context.

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