By Tom Fairless
SINTRA, Portugal -- European Central Bank President Mario Draghi
signaled Tuesday that the bank could roll out fresh stimulus as
soon as its next policy meeting in July, sending the euro lower
against the dollar and prompting an unusual rebuke from U.S.
President Donald Trump.
Mr. Draghi said ECB policy makers would consider "in the coming
weeks" how to adapt their policy tools "commensurate to the
severity of the risk" to the economic outlook. Options include
extending the time frame before the next interest-rate increase, a
reduction in the already negative policy rate or restarting bond
purchases.
"Mario Draghi just announced more stimulus could come, which
immediately dropped the Euro against the Dollar, making it unfairly
easier for them to compete against the USA," Mr. Trump tweeted
about three hours after Mr. Draghi's comments were released.
The criticism came shortly before Fed policy makers were set to
begin a two-day meeting in Washington on Tuesday. Mr. Trump has
called on the Fed to cut rates and has said in recent interviews he
doesn't have the same regard for the central bank's traditional
independence from politics as other recent U.S. presidents.
Asked in an interview with ABC News's George Stephanopoulos
about whether his criticism of Fed Chairman Jerome Powell could
undercut Mr. Powell's credibility, he said, "Yes, I do. But I'm
gonna do it anyway."
Mr. Trump has taken a particularly strong interest in short-run
developments in currency markets and has voiced concerns over the
strength of the U.S. dollar. Those concerns reflect Mr. Trump's
broader view that global trade can be a zero-sum game, in which the
gains of one nation come at the expense of others.
Investors responded favorably to Mr. Draghi's remarks, sending
the euro down by more than half a cent against the dollar, to
$1.1187. Yields on 10-year German government bonds fell to a fresh
all-time low of minus 0.315% as investors digested the prospect of
fresh bond purchases by the ECB. French 10-year yields dropped
sharply and hit 0%, their lowest ever.
The European Union has long sold more goods to the U.S. than it
has bought. But that trade surplus reached a record high of EUR139
billion in 2018, up from EUR119 billion in 2017. Figures released
Tuesday showed the bloc's surplus has continued to widen in 2019,
although at a slower pace, amounting to EUR48.2 billion in the
first four months of the year.
Advisers to President Trump have complained for years that the
euro is grossly undervalued. The U.S. administration has threatened
to impose tariffs on Europe's auto exports unless the bloc strikes
a trade deal with the U.S.
"European Markets rose on comments (unfair to U.S.) made today
by Mario D!," Mr. Trump tweeted. "They have been getting away with
this for years, along with China and others."
His comments raise the prospect of a "nightmare scenario" in
which the ECB and Federal Reserve engage in a race to the bottom on
exchange rates, creating economic damage that could aggravated by
trade tariffs, said Frederik Ducrozet, an economist with Pictet
Wealth Management in Geneva.
The ECB isn't alone in considering fresh stimulus. The world's
major central banks have rapidly shifted gear in recent months,
shelving plans to increase short-term interest rates and seeking
instead to ease policy amid signs that the global economy is
softening.
Many central banks in the Asia-Pacific region, including New
Zealand and Australia, have already reduced interests in recent
weeks. The Federal Reserve could signal on Wednesday that it is
preparing to cut short-term interest rates, with bond markets
pricing in two rate cuts this year.
The ECB is in a trickier position, though, because its key
interest rate is minus 0.4%, almost 3 percentage points lower than
the Fed's.
In a sign of the headwinds Europe faces, exports from the
eurozone to the rest of the world fell 2.5% in April compared with
March, according to the European Union's statistics agency Tuesday.
Meanwhile, Germany's ZEW index, a gauge of sentiment in the
financial markets, fell by 19 points to minus 21.1 in June.
Mr. Draghi said ECB policy makers would consider "in the coming
weeks" how to adapt its policy tools "commensurate to the severity
of the risk" to the economic outlook.
In particular, the ECB could tweak the parameters of its EUR2.6
trillion bond-purchase program, known as quantitative easing or QE,
to create room for fresh purchases, Mr. Draghi said. The bank could
also cut interest rates further and introduce tools to mitigate the
side effects, he said.
"The rate cutting genie is out of the bottle," said Bart
Hordijk, FX Market Analyst at Monex Europe. "This opens the
trapdoor to lower levels" of the euro against the dollar.
That compares with a lackluster market reaction to the ECB's
latest policy move two weeks ago. Then, the ECB signaled it
wouldn't raise short-term interest rates through the middle of
2020, but investors were underwhelmed, sending the euro higher
against the dollar.
Any move to restart QE would represent a sharp switch of course
by the ECB, which only phased out the program in December and had
until recently been guiding investors to expect interest-rate
increases.
The ECB currently buys no more than 33% of the bonds of any
individual government through its QE program. Increasing that limit
could trigger fresh controversy and legal challenges in Germany,
Europe's largest economy, where officials have long been deeply
skeptical of the ECB's bond purchases.
Mr. Draghi warned Tuesday of "lingering softness" in
forward-looking economic indicators, and said the risk of
protectionism and vulnerabilities in emerging markets was weighing
on Europe's large manufacturing sector.
"In the absence of improvement, such that the sustained return
of inflation to our aim is threatened, additional stimulus will be
required, " Mr. Draghi said.
The speech is Mr. Draghi's last at the ECB's Sintra research
conference, Europe's answer to the Fed's Jackson Hole meeting,
before his eight-year term ends in October. It indicates that the
Italian's impact could be felt for some time after he steps down,
regardless of who European leaders name as his successor.
-- Paul Hannon in London and Nick Timiraos in Washington, D.C.
contributed to this article
Write to Tom Fairless at tom.fairless@wsj.com
(END) Dow Jones Newswires
June 18, 2019 09:27 ET (13:27 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.