German Chancellor Angela Merkel told students in Berlin that a "too weak" euro is behind Germany's big trade surplus, which has been a point of contention with the Trump administration.
Merkel's comments come ahead of Friday's gathering of G-7 heads of state in Italy, and trade has been a thorny issue as the U.S. takes a new tougher stance.
"It definitely lit a fuse under the euro today," said Boris Schlossberg, BK Asset Management managing director, foreign exchange strategy. The euro had been lower, after last week's 2.5 percent gain, but Merkel's comments before a group of secondary-school students reversed those losses and sent it to a six-month high of $1.1274.
The German chancellor's remarks came in response to a question while she was appearing on a panel discussion on how Germany could build a closer relationship with French President Emmanuel Macron. She was asked how to deal with the trade imbalance between the two
Merkel also had discussed the challenges facing the European Union over the U.K.'s withdrawal, according to reports. She said her main goal was to keep the EU together and that means Germany would need to help Macron be successful.
"The euro is too weak — that's because of ECB policy — and so German products are cheap in relative terms. So they're sold more," she was quoted as saying.
While her comments were on topics important to Europe, a wider message was conveyed, said Schlossberg.
"At this point ... they can afford to have a little bit of a stronger euro. I think she's just playing politics with Trump, and saying we're doing our part," he said.
The euro has been rising, in part on the recovery of the European economy and the surge of investment interest in the euro zone. The U.S. dollar, meanwhile, has been waffling as traders speculate on how much of Trump's pro-growth agenda can be passed amid controversies surrounding his campaign and Russia. Analysts say the euro could break the U.S. election high of $1.13 and move to $1.15.
"I think she's just giving it lip service. The last thing she wants is a strong euro," said Schlossberg. "She realizes the euro needs to be around these levels for a long time for the European economy to heal."
Later, Jens Weidmann, who heads the German Bundesbank, said easy money policies from the ECB are still appropriate, but he also said the ECB should not postpone removing stimulus because of the state finances in some countries. Weidmann is a member of the ECB governing council.
When G-7 finance ministers met earlier this month, trade was not a formal agenda item. At the insistence of the U.S., language in the finance ministers' communique contained a promise to promote free trade but removed strong language used last year, vowing to avoid protectionism.
According to reports, other delegates pressured the U.S. not to turn away from international cooperation on trade, and U.S. Treasury Secretary Steven Mnuchin said the U.S. wants to retain the right to react if other countries don't play fair.
Trump will be arriving at the G-7 meeting after striking a number of trade deals in Saudi Arabia this past weekend. The president is now in Israel and will head to Brussels before going to G-7.
"I think Merkel's just trying to defend or anticipate the criticism," said Schlossberg. Germany ran a $65 billion trade deficit with the U.S. last year. "[The deficit] exists because of the quality of their products, not because of any manipulation of currency."
But Merkel may not have been deliberately speaking to Trump, said Marc Chandler, chief foreign exchange strategist at Brown Brothers Harriman.
"For me, this is not new news. This is a standard line Germany has," Chandler said. "The fact the euro rallied on it is just a sign of market psychology. ... [T]his is standard fare for Germany. 'The surplus is not our fault. This weak euro is the ECBs problem.'"
Chandler said Merkel also promoted more investment in Germany as a solution to the surplus.
"The chancellor may be as surprised as anybody at the market's response. The question was really about German foreign policy in light of Macron's election," he said. "The G-7 is important because it's heads of state."
However, Chandler said he does not expect much headway to be made there.
"The key issue is about trade and protectionism. I don't think anything changes," he said. "I'd say G-7 heads of state has nice photos, but substance, not so much. The meetings are important. Trump is still an unknown quantity for Europe."