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Euro rally is actually a dollar problem, says former ECB president

  • Jean-Claude Trichet says the ECB is in a difficult position given that the core of the problem comes from the U.S.
  • The growing strength of the euro – which recently broke the $1.20 benchmark – is raising questions about the future of monetary policy in Europe
  • Policymakers should be preparing for when the ECB hits the pedal on monetary stimulus, he said.

The European Central Bank has a big problem in its hands and it originates from the United States, a former president of the central bank told CNBC Friday.

The growing strength of the euro – which recently broke the $1.20 benchmark – is raising questions about the future of monetary policy in Europe. It's the ECB's aim to raise core inflation but a strong currency hinders that aim. According to the former president of the ECB, Jean-Claude Trichet, the bank is in a difficult position given that the core of the problem comes from the U.S.

"There are a lot of factors (for the euro's strength). The real economy in Europe is picking up now very, very visibly," he said about the attractiveness of the euro.

"That being said I think that the U.S. difficulty and particularly the hesitation on what to do as regards (with) new investment, as regards (with) taxation and so forth - and the difficulty of the present (U.S.) administration are playing also an important role. Because the problem is more that the dollar is weak vis-à-vis all currencies (rather) than the euro is very strong vis-à-vis all currencies," Trichet told CNBC at the Ambrosetti Forum in Italy.

Former European Central Bank (ECB) president Jean-Claude Trichet.
Eric Piermont | AFP | Getty Images
Former European Central Bank (ECB) president Jean-Claude Trichet.

The U.S. Federal Reserve has begun raising rates and slowly trying to normalize monetary policy after the crisis. The has fueled the dollar's strength alongside expectations that the new U.S. administration will deliver tax cuts and big infrastructure investment.

However, investors have become less convinced that President Donald Trump will be able to put forward such initiatives. At the same time, growing tensions between the U.S. and North Korea have made markets anxious and search for safer options – which includes the euro. The U.S. dollar has fallen about 10 percent since the start of the year against a basket of major currencies.

The ECB is set to meet next Thursday. Investors expect President Mario Draghi to speak about the euro's strength and to give some indication about plans for the direction of monetary policy.

"The ECB is likely to prepare markets for an announcement on the extension of quantitative easing to be delivered possibly in October," Barclays said in a research note Friday.

Trichet warned that even though Europe still needs an accommodative monetary policy, as core inflation remains well below the 2 percent goal, policymakers should be preparing for when the ECB hits the brake pedal on monetary stimulus.

"This accommodating policy will not last forever and all governments, all partners, public sector, private sector have to prepare for when we get out of it," he said.

One of the main tasks should be reform, including on the fiscal front. "Not enough (reform). It's absolutely clear that governments in general have been absolutely calm, quiet and tranquil - counting on central banks. This is a disgrace," Trinchet said.