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Exclusive: ECB governors agreed to look through euro rise - sources

FRANKFURT (Reuters) - European Central Bank policymakers agreed on Thursday to look through the euro’s appreciation, judging it was broadly in line with economic fundamentals and fearing any hint of a “currency war” with the United States, four sources at the meeting said.

FILE PHOTO: European Central Bank (ECB) President Christine Lagarde gives a signature which will be implemented on the newly printed euro banknotes at the bank's headquarters in Frankfurt, Germany November 27, 2019. REUTERS/Ralph Orlowski/File Photo

ECB President Christine Lagarde said the exchange rate had been discussed extensively and would be carefully monitored -- a statement that sent the euro EUR= rallying to $1.1916 as investors saw it as unexpectedly timid.

Four sources on the ECB’s Governing Council said policymakers had acknowledged the negative effects of the euro’s strength on inflation and growth. But they said there was general agreement that it accurately reflected a better economic situation on the European side of the Atlantic and expectations for an easy policy stance from the U.S. Federal Reserve.

They also cited increased confidence in the 19-country currency bloc after its joint response to the pandemic, as well as uncertainty ahead of November’s U.S. presidential election -- one more argument against hasty action on the currency.

“We’re not indifferent to it (the exchange rate) but we’re not prepared to start a currency war over it,” one of the sources said.

Speaking after the meeting, two sources said they saw $1.20 as not far from the equilibrium exchange rate at present.

An ECB spokesman declined to comment.

One of the sources said governors differed on the economic outlook, with those from core economies such as Germany, France and the Netherlands striking an upbeat tone while their southern European peers were more pessimistic.

ECB Chief Economist Philip Lane was seen as holding the middle ground, the source added.

The sources said policymakers at the meeting considered adopting the language used to stem the euro’s previous rally, in early 2018, when then-ECB President Mario Draghi described “volatility in the exchange rate” as “a source of uncertainty”.

But they decided to use a softer wording, simply saying in an opening statement that the Governing Council would “carefully assess incoming information, including developments in the exchange rate”.

The sources said governors still expect to update the ECB’s policy stance by the end of the year, with its Pandemic Emergency Purchase Programme (PEPP) now seen as the tool of choice, while there was no discussion of an interest rate cut.

Some also said the ECB should take into account the Fed’s new strategy, which sees it target an average inflation rate over an unspecified number of years, when adjusting its own as part of a continuing review.

Reporting by Francesco Canepa, Balazs Koranyi and Frank Siebelt; Editing by Catherine Evans

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