Goldman Sachs: Appreciation Unlikely To Prompt ECB Response

Goldman Sachs note that the "Euro has rallied substantially both against the Dollar and on a trade-weighted basis. However, an ECB policy response seems unlikely. First, the effects on GDP growth will be small, and those on inflation, while more meaningful, will likely be viewed as temporary. Second, on a real trade-weighted basis is still around the middle of its long-term range. Third, and perhaps most importantly, we expect that ECB officials will consider recent Euro appreciation in the context of the Recovery Fund, and its implications for Euro internationalization. Fostering a greater global role for the single currency is an explicit goal of the European Commission, and therefore an implicit goal of the ECB (albeit secondary to ensuring domestic price stability). The Euro has gained partly because the Recovery Fund and related measures represent an institutional upgrade to the EMU, which we think will help encourage international use of the currency over time. Fighting this type of Euro appreciation, especially through more deeply negative rates, could damage the prospects for internationalization just at it gets underway - in effect, snatching defeat from the jaws of victory."