ECB council member Mr Nicholas Garganas expects the euro to strengthen against the dollar due to the EU's healthier economic fundamentals compared with those of the US.
"Prospects are that the euro will strengthen, as the fundamentals of the European economy are healthier than those of the US," said Mr Garganas, who is also Greek central bank governor. He added yesterday that if the US economymaintained high productivity rates and high growth rates, as in the past, then the dollar could hold current levels. "However, the indications are that this is not possible and as a consequence I would say that the result will be a weakening of the dollar and a strengthening of the euro," he said.
Mr Garganas also warned of potential inflationary pressures in the euro zone due to higher labour costs and extra liquidity. "This liquidity is in the system and if conditions change rapidly and there is a swift recovery, this always creates risks of a resurgence in inflation".
Inflation rose slightly in July in the euro zone to 1.9 per cent from a year earlier, versus June's 1.8 per cent, but was still below the ECB's 2 per cent ceiling, confirming the central bank's holding stance on interest rates.
The ECB kept its benchmark rate at 3.25 per cent in August as it awaits clear signs of economic recovery.
"At the moment we are of the opinion to wait and see how things develop and take our decisions [on interest rates] later," Mr Garganas said.
He also underlined the need to proceed with European structural reforms and to adopt more flexible labour markets to help bolster economic growth. - (Reuters)
