In a rather blunt language, the ECB President Mario Draghi calls the American Secretary on the carpet for breaking an international understanding in its pursuit of a weaker dollar. The ECB has a major headache because of the shift in U.S. policy away from international cooperation, raising the prospect of a currency war that will ultimately be damaging to global trade.

 Draghi did not mince words when said that there was a clear understanding that nations would “refrain from competitive devaluations, and will not target our exchange rates for competitive purposes”. Yet, that is precisely what the Treasury Secretary is trying to do by talking down the dollar. In other words, Draghi is warning foreign countries not to follow the United States in a race to the bottom.

What concerns Draghi is that the EU has reached a point where growth has picked up considerably and inflation is starting to take hold after several years of fighting deflation. Speculation, up to now, was rife that the ECB would start to wind down its bond-buying program and even start to raise short-term rates as a sign of continued economic strength. Both policy moves have been taken off the table in response to the dollar devaluation.

Figure 1 Euro/Dollar

But the surge in the value of the Euro—19% since January 2017— will likely derail the ECB’s efforts to reach its inflation target. Euphemistically, Draghi states that“the recent volatility in exchange rates represents a source of uncertainty which requires monitoring with regard to its possible implications for the outlook for price stability.” Accordingly, Draghi made it clear that the ECB will continue with its bond-buying program at a rate of €30 billion a month through September and “beyond if necessary”. More importantly, key interest rates wouldn’t rise “for an extended period of time.” U.S. dollar policy has stayed the hand of the ECB indefinitely.