Supported by

Draghi, Chief of Europe’s Central Bank, Chides Mnuchin Over Dollar Comments

Image

By Jack Ewing

Jan. 24, 2018

FRANKFURT — Mario Draghi, the president of the European Central Bank, directed unusually sharp criticism at Steven Mnuchin, the United States Treasury secretary, on Thursday, effectively accusing Mr. Mnuchin of violating agreements among nations against starting currency wars.

Mr. Draghi, speaking at a news conference here, said he objected to “the use of language in discussing exchange rate developments that doesn’t reflect the terms of reference that have been agreed.” He then quoted from an agreement reached in Washington in October under which countries promised to “refrain from competitive devaluations.”

Mr. Draghi did not mention Mr. Mnuchin by name, but he was clearly referring to the Treasury secretary’s remarks on Wednesday at a World Economic Forum panel in Davos, Switzerland, that a weaker dollar was good for United States trade. The comment was interpreted as an effort to talk down the dollar, which would breach the international nonaggression pact on currency rates.

On Thursday, Mr. Mnuchin told reporters in Davos that his comment had been misunderstood.

“I thought it was actually balanced and consistent with what I’ve said before,” he said, “which is we’re not concerned with where the dollar is in the short term. It’s a very, very liquid market and we believe in free currencies. And that there’s both advantages and disadvantages of where the dollar is in the short term.” (After arriving in Davos, President Trump said during an interview that he wanted “to see a strong dollar” and that Mr. Mnuchin’s remarks had been misinterpreted.)

Central bankers usually refrain from rhetorical fisticuffs with government officials, but Mr. Mnuchin’s initial remark arrived at a sensitive time for the eurozone.

Europe’s economy is performing better than anyone had expected it would be just a few months ago. But the growth has brought some unwelcome side effects. In particular, the euro has reached a three-year high against the dollar as investors anticipate the European Central Bank dialing back its economic stimulus efforts sooner than previously expected, which would mean higher interest on the euro.

A strong euro makes products manufactured in the 19-country eurozone more expensive abroad, which could hurt exports and ultimately create a drag on economic growth.

Mr. Draghi has already struggled to contain investor expectations about when the central bank would end the money-printing program known as quantitative easing. He was obviously unhappy that a top official in the Trump administration was inciting volatility in currency markets.

Mr. Draghi portrayed Mr. Mnuchin’s comments as part of a broader deterioration in international etiquette. At a meeting of the central bank’s Governing Council that preceded the news conference, Mr. Draghi said, “Several members expressed concern and this concern was broader than simply the exchange rate. It was about the overall status of international relations right now.”

The central bank signaled no changes in policy on Thursday, reiterating that it would continue its stimulus program at least through September in order to hold down market interest rates and to nudge inflation toward the official target of 2 percent. And policymakers left open the possibility of increasing the stimulus efforts if conditions worsened.

A statement by the Governing Council included several phrases that would normally be taken as indications that the central bank was in no hurry to put the brakes on the growth of the eurozone economy. Among the relevant phrases:

•“Domestic price pressures remain muted overall and have yet to show convincing signs of a sustained upward trend.”

•“The recent volatility in the exchange rate represents a source of uncertainty.”

•“An ample degree of monetary stimulus remains necessary.”

Still, the euro rose against the dollar as traders effectively ignored attempts to convince them that there had been no change in the bank’s stance.

“Without saying anything new,” Mr. Draghi moved the markets, Carsten Brzeski, an analyst at ING Bank in Frankfurt, said in a note to clients. “But probably not in the intended direction.”

Investors and analysts had been even more keenly attuned than usual on Thursday to any changes in Mr. Draghi’s tone or language that might hint at an end to the stimulus program. Comments by some Governing Council members suggested that a growing faction favored an abrupt end to stimulus after September, rather than a gradual withdrawal.

Since December, the indicators of eurozone growth have steadily gotten stronger. Surveys of business and consumer confidence find both at their highest levels in more than a decade. Unemployment, at 8.7 percent, is at its lowest level since early 2009. The leading survey of business confidence in Germany is at a record high, according to data published on Thursday.

As a result, expectations have risen that the quantitative easing program, in which the central bank creates new money and uses it to buy government and corporate bonds, will end after September. Such a move would set the stage for the bank to begin raising its key interest rate, currently at zero, sometime in 2019.

A majority of the 25-member Governing Council probably lean toward a gradual end to quantitative easing. But some members who are not usually considered hard-liners on the issue of inflation have lately questioned whether it made sense to prolong the stimulus program.

Among those doing the questioning is Benoît Coeuré, one of six members of the central bank’s executive board, which oversees its operations. (The other council’s other 19 members are the leaders of the national central banks in the eurozone.) Mr. Coeuré has generally been seen as a proponent of quantitative easing.

Recently, though, he has sounded very bullish about the eurozone economy, a sign that he might join those who think the bond-buying should come to an end. As one of the Governing Council’s most influential members, Mr. Coeuré could help tip the balance of power.

“The current economic expansion in the euro area is stronger than it has been for a decade,” he said in Bangkok last month, “and broader than for two decades.”

Mr. Draghi, in effect, said on Thursday the appearance of increasing disagreement among Governing Council members was not significant.

“I don’t think the differences between the various members of the Governing Council are as substantive as they were on other occasions,” he said. “We are not talking about deep existential differences.”