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Euro falls after ECB minutes show concern at strength

The euro has fallen to its lowest level of the month after the European Central Bank’s policymakers expressed concern about the currency’s recent strength, according to the minutes of its latest interest rate-setting meeting.

The single currency, which had hit a two-and-a-half year high against the dollar in recent months, was down more than 0.8 per cent on Thursday after the concerns were revealed. It had risen almost 5 per cent against a basket of currencies since the middle of May.

The communication problem facing the ECB over the currency is acute at a time when it is looking make a decision on tapering its €2tn quantitative easing programme.

A strong euro complicates the ECB’s efforts to hit its inflation goal of just under 2 per cent by making imports cheaper and weighing on export growth.

The minutes of the ECB’s July policy vote showed its members believed there was a risk the currency could rise in value again.

While most of the recent gyrations in prices of financial assets were down to the region’s economic recovery, “concerns were expressed about a possible overshooting in the repricing by . . . markets, notably the foreign exchange markets, in the future”, the minutes said.

“It was underlined that the still favourable financing conditions could not be taken for granted and relied to a considerable extent on a continued high degree of monetary policy support.”

“Today’s minutes fit into the picture of an ECB which wants to steer and moderate the process towards tapering extremely cautiously,” said Carsten Brzeski of ING.

The ECB’s governing council’s next vote is on September 7. Mario Draghi, the bank’s president, is expected to face questions on why the ECB is holding discussions on slowing down the pace of its bond buying in 2018 while at the same time presenting forecasts for weaker inflation.

A decision on tapering QE is expected at the council’s October meeting.

Some analysts have pointed the finger at the ECB for the euro’s ascent. The currency rose sharply after a speech delivered by Mr Draghi in Portugal in late June in which he mentioned “reflationary” forces were emerging in the eurozone economy — and again after his press conference following the July vote.

The minutes put the currency’s rise down to two factors: the removal — following the election of Emmanuel Macron as France’s president — of the political uncertainty that erupted in the wake of the Brexit vote, and market expectations over US interest rates. “These two factors were now largely priced out, leaving the euro back around the levels prevailing before the UK referendum.”