MNI INTERVIEW2: Euro Surge Could Make ECB Buy Dollars-Bofinger

The European Central Bank could be forced to buy dollars to weaken the euro if a slide in confidence in U.S. debt prompts investors to pour into European bonds, former German Council of Economic Experts member Peter Bofinger told MNI.

U.S. President Donald Trump is “doing everything he can to destroy the trust in the American currency,” said Bofinger, who added that euro appreciation resulting from any sharp rise in demand for German Bunds in particular would be deflationary, while magnifying the negative impact on growth and inflation of U.S. tariffs.

“The ECB would be in the uncomfortable position of having to do something against the exchange rate - which the European Treaties do allow them to do - and the only thing they could do is to purchase U.S. dollars and invest them in U.S. government bonds,” Bofinger said in an interview.

“We could be in for a period of exchange rate pressure, in which the ECB will have to decide whether to let it happen or to follow the Swiss approach. That's also why I’m sceptical when Madame [ECB President Christine] Lagarde says she wants to increase
the reserve role of the euro. Be careful what you wish for.”

Bofinger, the author of a recent paper on the topic, was also critical of the approach by the ECB and other European authorities to stablecoins and digital euros. The ECB’s bet on a digital euro, which could have a limit on holdings of around EUR3,000, is “completely flawed” as an answer to stablecoins, he said. (See MNI INTERVIEW: Digital Euro Risks Failure-Ex Bank Of Spain Gov)

Meanwhile, Markets in Crypto-Assets Regulation (MiCA) regulation requiring stablecoin issuers to hold at least 60% of reserve assets in bank deposits is “a little absurd because bank deposits of that size are anything but safe,” and risks creating a doom loop within the financial system.