Reference News Network, July 5 report. According to the website of Spain's "El Economista" on July 2, although the rapid appreciation of the euro indicates that investment is focusing on Europe, some members of the European Central Bank have warned that the consequences could be very negative. Specifically, they mentioned that this could hinder efforts to control inflation and cause significant damage to the economy. These two factors would greatly open the door for rate cuts. Deputy President of the European Central Bank, Luis de Guindos, has set a limit for this currency risk: 1 euro to 1.2 US dollars.

The euro's exchange rate against the US dollar has risen by about 14% this year due to loss of confidence in the United States, which has helped curb price increases in the eurozone, with the current inflation rate exactly meeting the target of the European Central Bank. However, the danger is that economic recovery may push the euro to appreciate to a level that causes the inflation rate to fall below the target, thereby damaging the competitiveness of the eurozone.

The loss of confidence in the US, to some extent, coincided with the acceleration of economic growth in Europe. This is not entirely because of the evolution of GDP, but rather because a significant shift towards an expenditure cycle is forming. Germany has broken its sacred debt rules and launched a large infrastructure plan. At the same time, the European Commission has relaxed deficit controls to welcome a shift in fiscal policy across the continent.

However, the main factor dominating everything is the weakness of the US. Matthew Ryan, head of market strategy at Ebury Company, said: "The euro's exchange rate against the US dollar is almost entirely driven by an increase in short positions on the dollar, not by a more optimistic outlook for the eurozone economy."

With the euro about to experience its longest bull run in over 20 years, this topic became the focus of the annual meeting of the European Central Bank held in Sintra, Portugal. De Guindos warned that breaking through 1.20 would bring many problems. This senior official stated that before this, "we can ignore it slightly," but "beyond this level, the situation will become much more complicated."

An appreciating euro will lead to lower inflation rates. The same situation has occurred in Switzerland. The appreciation of the Swiss franc is triggering a continuous fight against deflation. Mirabaud Bank in France pointed out: "Europe is facing dual deflationary pressures: on one hand, a large number of low-cost Chinese goods that previously went to the US are now flowing in; on the other hand, a strong euro further lowers import prices."

Market expectations are that the above exchange rate level will be reached in 2026, which is precisely due to the difference in pace between the European Central Bank and the Federal Reserve (which is expected to ease monetary policy), as well as investors moving from New York to Brussels.

Philip Lane, Chief Economist of the European Central Bank, said: "The trend we are currently seeing seems to continue, but we are certainly very curious about what will happen next."

"They are not yet willing to admit it, but the strength of the euro will become an increasingly concerning issue," said Carsten Brzeski, Head of Macro Research at ING. "In the long term, a stronger euro will not only bring greater deflationary pressure, but also pose a risk of harming the already struggling export industry, enough to justify further rate cuts."

Davide Onorato, an analyst from TS Lombard Global Macro Research in the UK, holds the same view in his latest report. He said: "We have repeatedly warned that the strength of the euro has become a problem for the European Central Bank, as it leads to excessive declines in economic growth and inflation in the short term."

Martins Kazaks, Governor of the Latvian Central Bank and a member of the European Central Bank's Governing Council, said: "If the euro appreciates further, it will put pressure on inflation and exports, potentially leading to another round of rate cuts."

BNP Paribas recently reported that a 10% appreciation of the euro would reduce corporate profits by 2% to 3%. The European Central Bank mentioned in a recent report that a 10% appreciation of the euro would result in a 5% to 10% decline in overall eurozone exports.

TS Lombard Global Macro Research noted: "We should not be overly concerned about the current level of the euro and its macroeconomic impact." The institution expects the eurozone economy to continue growing, albeit at a slower pace. Tariffs have a greater impact on the eurozone economy than exchange rates, "we see the recovery of European industry and the recovery of the currency happening in sync." Regardless, the institution believes that the euro's issues can be resolved by the European Central Bank "cutting interest rates again in September." (Translated by Han Chao)

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