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ECB policymakers set pain threshold for euro rise in weak economy
Published by Global Banking & Finance Review®
Posted on July 1, 2025
3 min readLast updated: January 23, 2026
Global Banking & Finance Review®
Company
Published by Global Banking & Finance Review®
Posted on July 1, 2025
3 min readLast updated: January 23, 2026
ECB officials caution that a rising euro could harm the eurozone's weak economy, especially with looming US tariffs. Interest rate cuts are unlikely.
By Francesco Canepa and Balazs Koranyi
SINTRA, Portugal (Reuters) -Two European Central Bank policymakers warned on Tuesday about the hit from a further appreciation of the euro on a weak euro zone economy that is bracing for painful U.S. tariffs.
The euro has risen some 9% against the dollar since April as investors, spooked by U.S. President Donald Trump's unpredictable economic policy, warmed up to the European Union's newfound military and industrial ambitions.
But a strong currency is a mixed blessing for the central bank because it makes exports more expensive and imports cheaper, pushing down both growth and inflation.
"If there is a 10% tariff plus a 10%-plus appreciation of the exchange rate, this is large enough to affect export dynamics," Latvian central bank governor Martins Kazaks told Reuters at the ECB's annual Forum on Central Banking in Sintra, Portugal.
EU officials have resigned themselves to a 10% tariff on goods exported to the United States as their baseline as they continue difficult negotiations with Trump's administration ahead of a July 9 deadline.
The euro was trading at $1.18 on Tuesday, up 14% since the start of the year but still roughly in the middle of the range in which it has been for the past decade or so.
ECB vice-president Luis de Guindos said the central bank could ignore the euro's rise against the dollar up to $1.20 but not higher.
"Beyond that, it will be much more complicated," de Guindos told Bloomberg TV.
Euro zone manufacturing is only starting to recover from its 2022-24 - partly energy-related - slump, with new orders arresting a three-year slide last month.
Both Kazaks and de Guindos said the economy was weak but seemed to play down the prospect of more support from the ECB via interest rate cuts.
"The majority of the rate adjustment has been done," Kazaks said. "If there are further cuts, they will be small and have signalling value, provided that we remain in the baseline."
De Guindos said an additional cut was "not going to help the economy", which instead needed certainty on trade and other policies.
The ECB has cut rates eight times in the space of a year as inflation eased to its 2% target, where it expects it to stay for the foreseeable future except for a short-lived dip in 2026.
It has signalled it will pause its rate-cutting streak in July and Lithuanian governor Gediminas Simkus said the central bank may keep rates on hold for longer.
"I don't know if we'll have all the information we need by September, but I remain open to every possibility," Simkus said in an interview in Sintra on Monday.
"I believe a move, if any, is more likely towards the end of the year."
Euro zone inflation came in at 2% in June, a flash reading showed on Tuesday, and consumers - who were stung by a cost of living crisis in 2022-23 - are also paring back their expectations for future price growth, according to an ECB survey.
(Reporting by Francesco Canepa, Editing by Louise Heavens and Ros Russell)
ECB policymakers warned that a further appreciation of the euro could negatively impact the weak eurozone economy, making exports more expensive and imports cheaper.
The euro was trading at $1.18, having risen 14% since the start of the year, but is still within a historical range.
Both Kazaks and de Guindos indicated that while the economy is weak, they downplayed the likelihood of further significant interest rate cuts, suggesting any future cuts would be small.
Eurozone inflation came in at 2% in June, aligning with the ECB's target, although consumers are adjusting their expectations for future inflation.
The eurozone economy is being affected by external factors such as potential tariffs on goods exported to the U.S. and the uncertain economic policies of the Trump administration.
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