By PAN PYLAS and DAVID RISING
BERLIN (AP) â¿¿ European Central Bank president Mario Draghi pledged Thursday to keep a close eye on the economic impact of the rise of the euro, a move that surprised many in the markets and sent Europe's single currency skidding lower.
Draghi said the recent appreciation of the euro was a sign of rising confidence in the region but he acknowledged that it could weaken economic growth.
Over recent months, the euro has risen from around the $1.20 mark to trade over $1.35 even though a number of the 17 European Union countries have sunk back into recession.
A rising exchange rate could have a major impact on the eurozone economy. It could raise the price of exports, unappetizing news for many of the region's hard-pressed businesses. That prospect of lower activity could also weigh on prices â¿¿ as would the lower import costs that the high euro would likely engender.
Several European leaders, notably French President Francois Hollande, have already started to voice their concern. And without explicitly addressing those fears, Draghi indicated there could be a policy response.
"The exchange rate is not a policy target but it is important for growth and price stability," Draghi said in a press briefing after the bank kept its main interest rate unchanged at the record low of 0.75 percent.
"We will want to see if the appreciation will alter our assessment as far as price stability is concerned," he added. "We will closely monitor money market developments."
The euro took a nosedive after those remarks, tumbling from around $1.3550 to just above $1.34.
"Draghi's biggest challenge was to show his magic skills of verbal interventions and to talk down the euro exchange rate," said Carsten Brzeski, senior economist at ING. "He succeeded."
Though the euro has clearly benefited from the region's easing debt crisis, analysts also say a more aggressive Japanese economic policy designed to revitalize that country's moribund economy has indirectly pushed up the value of the single European currency.