• By
  • Brian Blackstone

Roughly half of the euro’s decline between May 2014 and February were driven by the weakening of its exchange rate against the U.S. dollar and Chinese renminbi, the European Central Bank said in its economic bulletin Thursday.

In a study included in the bank’s economic bulletin (pages 42-44) the ECB notes that, between the euro’s May 2014 peak and Jan. 23 of this year, the euro weakened about 10% against a broad basket of currencies. The euro, it said, “has stabilized in recent weeks with the return of capital inflows following the ECB’s announcement of its expanded asset purchase program after the 22 January 2015 Governing Council meeting.”

Of that drop, “half the fall in the (nominal effective exchange rate) was accounted for jointly by the US dollar and the Chinese renminbi,” the ECB said. Each rose about 20% versus the euro during that time frame, with the dollar “supported by expectations of further diverging monetary policies in the euro area and the United States, market uncertainty in an environment of declining commodity prices and heightened geopolitical tensions,” the ECB said.

The Swiss franc’s sharp rise against the euro, after the Swiss central bank abandoned its currency ceiling for the franc’s value against the euro in January, accounted for about 10% of the broad decline in the euro, according to the ECB’s estimates. The euro also weakened against the yen, sterling and many emerging market currencies.

These declines were offset somewhat by the sharp rise in the euro against the Russian ruble, and the eurozone currency also strengthened against the Swedish krona. “The euro also remained relatively stable against the currencies of commodity exporting countries, which came under downward pressure as a result of declining oil prices, as well as against currencies of central and eastern European EU countries,” the ECB said.

The report doesn’t project where things will go from here, which is, of course, the central question for financial markets. Nevertheless, the ECB suggested recent movements weren’t unusual.

The euro’s effective exchange rate “has experienced large swings since the outbreak of the global financial crisis. From a longer-term perspective, such large movements are not unusual and had also been observed before the crisis,” the ECB said.



Follow @WSJecon for economic news and analysis
Follow @WSJCentralBanks for central banking news and analysis

Get WSJ economic analysis delivered to your inbox:

Sign up for the WSJ’s Grand Central, a daily report on global central banking

Sign up for the Real Time Economics daily summary