Euro exchange rate back in spotlight as ECB meet to take action

The euros exchange rate against major currencies will be back in the spotlight today as the ECB (European Central Bank) meet up to take the next actions and failure to “do something big” could see markets once again punish the euro zone.

Last week, Mario Draghi had said “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough,”.

The ECB has little margin for error to maintain its credibility and avoid bond yields climbing in the indebted countries on the euro zone periphery. The market’s faith in Draghi will be tested before the 1230 GMT post-meeting press conference by a Spanish bond auction that could see its debt costs rise.

“Draghi has unfortunately painted himself into a corner. The ECB does need to demonstrate its credibility … Otherwise Draghi will lose face completely.” JP Morgan analyst Pavan Wadhwa said in a conference call.

“We could see markets going back to where they were before last Thursday,” said Nordea analyst Anders Svendsen, who expects more words but little concrete action from the meeting.

Falling Euro

As the crisis has intensified, the euro has taken a hit in foreign exchange markets. It has fallen about 15 percent in the past year to trade at $1.23 against the US dollar. On a trade-weighed basis it trades at nine-year lows.

The falling euro is likely to delay the day when inflation falls below the ECB’s target of 2 percent. In July, it remained at 2.4 percent. It also assuages fears of deflation, however, a spectre that could otherwise have prompted the ECB to consider large-scale bond buying.

IMF Urges Euro Zone Action

Speaking ahead of a critical meeting of the European Central Bank on Thursday, the head of the IMF signalled that they believe the European Central Bank should cut interest rates given low inflation levels.

The IMF has recently come under attack from private economists and analysts over its handling of the euro zone crisis, which some say is toeing the official European-German line. Its critics also question whether the IMF can remain truly independent and give independent advice while working as part of the “troika” of lenders in countries like Greece, Ireland and Portugal.

“I find it surprising when I see the hostile response,” IMF head Christine Lagarde said, vowing “to do everything I can” to protect the IMF’s credibility as it deals with Europe.

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Euro exchange rate back in spotlight as ECB meet to take action