The European Central Bank (ECB) is widely expected to keep euro zone interest rates unchanged today in the confidence the economic recovery is strong enough to bear the burden of the soaring euro for now.
Policy makers so far have not sounded worried about the rallying euro, which has gained some 6 per cent versus the dollar from the beginning of December, pressuring inflation and giving the central bank time before possibly tightening policy.
But the ECB may find itself in a bind if the euro rises further and causes problems for the export-dependent economy, analysts say. Businesses are already complaining the currency's strength is making it harder to sell their products abroad.
"For the time being it is not a major, major problem because . . . there is lots of compensation by the stronger than anticipated global recovery which is helping exports along," said Ms Christa Aranda-Hassel, economist at CSFB in London.
"But if the strength continues, and we start breaking pain thresholds for the industry . . . the clear risk is that we'll have a recovery which is export-led [but] stops in its tracks before having spilt over to domestic demand," she added.
Governing Council members made no comment when entering the ECB's headquarters for the meeting, which has now started.
Further euro gains might enable the ECB to wait longer before it raises its benchmark refinancing rate from a 2 per cent record low. Most economists in a Reuters poll said it would wait to do so until the second half of this year anyway.