The euro has declined steadily for the past year from above 1.22 per dollar to within close range of the 1.0640 low of March 2020, when the pandemic first hit. A test of parity to the dollar later this year is no longer a low-probability risk. Experts claim that a currency crisis of confidence is the last thing the European Central Bank needs. It already faces an almost impossible choice between counteracting soaring imported inflation or risking a renewed recession.
Imported inflation is exacerbated by the war in Ukraine because much of Europe’s energy purchases are priced in dollars. A weaker euro just magnifies the short-term problem. It is a reverse of the situation for most of this century when an arguably underpriced common currency drove exports to China and Russia.
The only logical answer seems to be for the ECB to raise its official deposit rate from the current super-stimulatory negative 50 basis points. But it must also ever-so-carefully keep financial conditions lax via other monetary tools, such as bank lending incentives.