When Mario Draghi spoke his now-famous words "whatever it takes" five-and-a-half years ago, the eurozone was in deep trouble. The debt crisis had engulfed the periphery countries and economic growth was nonexistent.
European Central Bank (ECB) post-meeting news conferences were dominated by questions regarding the survival of the single European currency -- hence the ECB president's remark in July 2012: "Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough."
It looks like it was. The ECB upgraded its growth forecasts for the eurozone at its latest meeting on Thursday and pledged to maintain its monetary stimulus in order to ensure the recovery is sustainable. Draghi even stressed that the central bank was ready to increase its asset purchases program (APP) again if the economy worsens.
Draghi also went to great pains to suggest that the easy monetary stance is here to stay. "The Eurosystem will reinvest the principal payments from maturing securities purchased under the APP for an extended period of time after the end of its net asset purchases, and in any case for as long as necessary," he said.
Investors also should not see inflation hitting 2% as the end of the road for the ECB's stimulus program. Draghi made clear that reaching the target for a short time would not be considered enough. Inflation "can go over 2% and come back," he said.
"We're talking about in the medium term, let's never forget that, and it has to be self-sustainable and self-sustained. Namely, it has to be there without our monetary policy support," Draghi said.
All this would suggest that the euro should be sold, not bought. The ECB is turning out to be more dovish than expected by even the most dovish of analysts out there. However, on the other side of the equation is a not-so-hawkish Federal Reserve, which through its slow pace of rate hikes has kept the dollar weak -- just as President Donald Trump likes it.
The dollar weakness will boost global trade, which is already recovering. An International Monetary Fund (IMF) working paper published in November showed that a 1% appreciation in the U.S. dollar exchange rate against all other currencies in the world leads to a decline in total trade in the world outside the U.S. of 0.6% to 0.8% within a year.
Despite headwinds from Asia for global trade, analysts at London-based think tank Oxford Economics have upgraded their outlook and expect world trade to increase by 6% this year and 4.5% next year, versus their previous forecasts of 5.7% and 3.8%, respectively.
"World trade growth is likely to be supported by emerging markets, which have made a large contribution to the trade recovery this year," Adam Slater, lead economist at Oxford Economics, said.
At least half the growth in global trade in the third quarter can be attributed to emerging markets, Slater said. Import growth has recovered strongly in a number of countries, including Brazil and Russia.
This bodes well for the eurozone, which relies quite heavily on exports. Besides feed-through from economic growth, global strength helps the euro because foreign exchange reserves are rising, and the euro is the world's second reserve currency after the dollar.
Global reserves had fallen by around 10% from mid-2014 to January 2017, but bounced almost halfway back by November, with fresh record highs in the reserve holdings of Switzerland, Taiwan, South Korea and Hong Kong, according to Société Generale analyst Alvin Tan.
Tan called this revival in reserves a "fundamental tailwind" for the euro's exchange rate versus the dollar, as reserve managers will likely diversify their currencies away from the dollar as their reserves grow. Tan expects the euro's exchange rate to climb to 1.27 to the U.S. dollar by the end of 2018 -- a 7.6% upside from the current level of around 1.18.
