European Central Bank Closely Monitors Impact of Euro Appreciation, Policy Challenges Emerge in 2026

Last year in the first half, the euro appreciated by 14% against the US dollar, a trend that drew significant attention from European Central Bank policymakers. ECB Governing Council member Kazaks recently stated that the economic impacts of the euro’s appreciation are gradually becoming evident, and the central bank needs to closely monitor its actual effects on the European economy.

Behind the 14% euro appreciation: US dollar weakness and policy uncertainty

The main driver of the euro’s appreciation in the first half of last year was the sharp depreciation of the US dollar. President Trump’s fluctuating stance on trade tariffs undermined market confidence in the dollar, leading to a rise in the euro’s value relative to the dollar. At the same time, this policy uncertainty increased volatility in global financial markets, further strengthening the euro’s upward trend.

12-month transmission cycle approaching, economic impacts gradually emerging

Kazaks emphasized that exchange rate changes typically take about 12 months to fully transmit to the real economy. This means that the euro’s appreciation in the first half of 2025 will only fully impact the European economy after entering spring 2026. The ECB’s latest forecasts already reflect most of the appreciation effects, but officials believe that ongoing monitoring is necessary to assess specific impacts on export competitiveness, corporate profit margins, and other economic factors.

Central bank officials remain cautious, leaving room for policy flexibility

Several policymakers, including ECB President Lagarde, have explicitly stated that they will remain vigilant and ready to take action based on economic developments. Kazaks noted that the current team is in a “watching mode,” temporarily believing no immediate measures are needed but will closely observe the euro’s continued appreciation. This reflects the ECB’s cautious and flexible policy stance—neither rushing to act nor being passive—waiting for more economic data before making decisions.