For falling euro, ECB intervention probably a move too far By Reuters

By Saikat Chatterjee and Dhara Ranasinghe

LONDON (Reuters) -The euro’s fall of as much as 4% against the dollar and Swiss franc in two weeks is raising the question of what – if anything – the European Central Bank will do about it.

Euro weakness, in normal times, would be welcomed by an export-reliant bloc that has long struggled to meet a 2% inflation target. But in days of 5%-plus inflation, record energy import bills and a looming Russia-linked growth hit, it is something the policymakers cannot ignore.

Given that the decline is down primarily to the diminishing likelihood of a near-term ECB interest rate rise, investors will want to see how far policymakers are willing to tolerate currency weakness.

What the ECB says is in focus after the Swiss National Bank on Monday pledged to curb franc strength – while the SNB frequently steps in to buy euros and dollars, it has not intervened verbally since 2016.

Analysts speculate that Thursday’s ECB statement may throw in a mention of monitoring exchange rates, a line omitted in recent months. It may also signal rate hikes remain an option. Some even suggest the possibility of direct currency intervention – an extremely rare event.

“The ECB should intervene in ,” is the title of a note by Deutsche Bank (DE:)’s head of global currency strategy George Saravelos, who said euro depreciation was already inflicting economic damage via the import price channel.

“The single most efficient way to ease inflationary pressures in the euro zone at the moment is via a stronger euro,” Saravelos wrote, adding “the more oil and push higher, the more the euro drops, pushing commodities priced in euros even higher – a vicious inflationary spiral”.

Commodity markets have seen eye-watering price surges this year, with touching 14-year highs around $140 a barrel or, in euros, a record-high of around 128 euros per barrel.

European gas prices, up 150% this year, are projected by some to rise by another third to 300 euros a megawatt hour.

Annual euro area inflation was a record 5.8% in February, with energy inflation running at 31%. Citi estimates Brent’s latest surge will add 0.3 percentage points to the harmonised index of consumer prices (HICP) in March-April while gas prices will add 0.4 percentage points in the coming year.

Saravelos does not see FX intervention as the most likely outcome, although he does not rule out a coordinated move involving G7 central banks if “things get disorderly”.

Instead he suggested lifting interest rates to 0% from the current -0.5% and a further bond-buying boost as the most effective solution.

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