(The opinions expressed here are those of the author, a columnist for Reuters)
LONDON, July 26 (Reuters) - The euro is marching higher, and for once, the European Central Bank appears content to sit back and let it rise.
While there's little doubt an ever-higher euro is a headwind for European exporters and adds to the already sizeable disinflationary forces in Europe, investors around the world have good reason to welcome it.
The de facto policy tightening from a higher exchange rate could force the European Central Bank to further delay winding down its bond purchases, keeping benchmark borrowing costs low, equity risk premia high and global financial conditions looser than they would otherwise be.
Equally important, the simultaneous decline in the dollar has given the U.S. economy a new lease of life -- just when it looked liked like it might roll over -- and injected renewed impetus into the ageing bull market in risky assets globally.
There's not much that financial markets, particularly dollar-exposed emerging markets, like more than a weaker greenback and low Treasury yields because large swathes of borrowing in countries outside the United States, Europe and Japan is done in dollars.
The euro is up 11.5 percent against the dollar so far this year, on track for its best year since 2003. On a trade-weighted basis the single currency is up 4.6 percent year-to-date -- another percentage point rise between now and December will also will deliver the best year since 2003.
That export-sapping pace of appreciation is bound to set alarm bells ringing in capitals across the euro zone and in Frankfurt. At 1.3 percent, inflation is already well short of the ECB's target of "below, but close to" 2 percent, and the euro's surge will only push that goal further out of reach.
According to economists at BNP Paribas, a 10 percent rise in the euro corresponds with a fall of 0.45 percentage points in euro zone inflation over the following 12 months.
ECB President Mario Draghi said on July 20, when the euro was around $1.15, that the exchange rate had garnered "some attention" among ECB policymakers. It's up nearly three cents since then and is its highest in two and a half years.
Paradoxically, the talk of ECB "tapering" its asset purchases is keeping a lid on euro zone borrowing costs. The rise in the euro has encouraged investors to borrow money in low-yielding assets and buy higher-yielding ones such as southern European bonds.
ECB policymakers see October as the most likely date to decide whether to start winding down its stimulus but any move will be gradual. Policymaker Ewald Nowotny said on Wednesday that asset purchases could be slowed from the start of next year but should not completely stop.
Yet the downward pressure on inflation from the high exchange rate could drown out the taper talk altogether and see the ECB actively add to its 2.3 trillion euros of asset purchases.
Even though euro zone growth is its strongest since 2011, strategists at Citi expect the ECB to announce in September that it will expand its QE programme by 150 billion euros.
Either way, the euro zone economy and global markets look set to enjoy ample ECB liquidity for some time to come.
DOLLAR TRUMPS VIX
Meanwhile, the Federal Reserve's ultra-gradual rate-hike cycle and cautious approach to winding down its $4.5 trillion balance sheet has crushed the dollar this year. And world markets are loving it.
The trade-weighted dollar is down 8.5 percent year to date, on course for its biggest annual decline since 2003. And despite four Fed rate hikes in the last 18 months, the 10-year Treasury yield is actually down on the year.
This is good news for emerging markets. Dollar credit to non-financial customers outside the United States stands at $10.5 trillion, of which $3.6 trillion in emerging markets, according to the bank for International Settlements.
The MSCI's 47-country All World share index and Wall Street this week chalked up fresh new highs and Asian stocks jumped to their highest in almost a decade.
Hyun Song Shin, head of research at the BIS, believes the dollar has replaced the VIX index of implied volatility on Wall Street as the best barometer of global investor risk appetite and financial market leverage.
"When the dollar is strong, risk appetite is weak," he said in a speech last November. "Given the dollar's role as barometer of global appetite for leverage, there may be no winners from a stronger dollar."
Shin gave that speech just as the dollar was at the end of its 18-month, 30 percent rally. If there were no winners from its strength then, there are appear to be plenty winners from its weakness now. (Reporting by Jamie McGeever Editing by Jeremy Gaunt.)