Euro-Dollar Setback Spurred by ECB Nerves

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The euro to dollar exchange rate (EUR/USD) makes a prompt retreat from highs just above 1.20.

EUR/USD's break of 1.20 drew a quick response from the European Central Bank (ECB), reports Reuters.

Both ECB Governing Council members Kocher and Villeroy signal today caution over euro's recent rapid gains, highlighting concerns the rise will be deflationary.

"We are closely monitoring this appreciation of the euro and its possible consequences in terms of lower inflation,” said Francois Villeroy de Galhau on LinkedIn.

EUR/USD peaked at 1.2082 on Tuesday as it marked a 3.50% advance from Thursday.

Austria's ECB representative, Martin Kocher, was more forthright, telling the FT that the ECB may cut rates if euro rises further.

"If the euro appreciates further and further, at some stage this might create of course a certain necessity to react in terms of monetary policy," Kocher said. "But not because of the exchange rate itself, but because the exchange rate translates into less inflation, and then this is of course a monetary policy issue."

The comments echo those made by Luis De Guindos last July when EUR/USD touched 1.20.

The euro's midweek pullback hints at the potential for a more cautious euro into next week's ECB interest rate decision and press conference.

For FX, the prospect of an interest rate response by the ECB is signifificant and it can go some way in explaining why EUR/USD has fallen more than other USD pairs today.

The dollar's recent selloff has taken markets by surprise owing to its scale and speed.

Signs of coordination between U.S. and Japanese authorities to lift the yen and weaken the Greenback sent a message to traders that U.S. authorities were serious about weakening the currency.

U.S. President Donald Trump encouraged the move Tuesday when he appeared to welcome the currency's weakness.