The Dollar Also Rises

Well…this has certainly been a challenging year for Canada. It seems as though we have been hit with one major catastrophe after another. First SARS swept through, exacting its toll in human lives and tourist dollars. Then an angry cow in Alberta devastated the cattle industry, and continues to wreak economic havoc over the entire agriculture sector. The lights went out in Ontario. Who's in charge of that? A large chunk of British Columbia burned to cinders, while another large chunk was given the mother of all baths. The east coast was battered by Juan, and the prairies were sun dried in the extreme. It has been a character building year for Canadians.

With all of this baggage you might tend to wonder why our dollar would be rising against some of the world's major currencies. The loonie has risen against the U.S dollar from $.64 in January to a recent crescendo of well over $.76, an increase of 22.6%. It has gained 6.5% against the Euro, 9.8% against the Yen and 12% against the British Pound. In spite of our disease and disaster, the world is lusting after our currency. Is it a good thing? Is it our fault?

Canada is a net exporter of goods. While we have been maligned for our lagging competitiveness, the prices of our goods on the international market have been very attractive over the past several years. Say thank you to our previously flagging dollar.

Canada must have a strong export market. Our population is not large enough to sustain our economy on the basis of domestic consumption alone. A low dollar stimulates exports. Our alleged competitive failings have been mitigated by that beautiful low dollar. Yes, even though the annual trip to Florida left a deeper hole in the line of credit, the low dollar was a good thing.

The dollar is now rising at an unheard of pace. What have we done to deserve such a fate? It may not be our fault.

The United States has long been concerned about its trade deficit. Unlike Canada, the U.S. imports more than it exports. Its economic strength lies in the consumptive capabilities of its massive, affluent population. It has always driven, built, ate, listened, watched and wore its way to economic utopia.

As the stock markets crashed and money became a little tight in the land of the free, the economy faltered. Domestic consumption waned, causing a stir in the Bush camp. This is not the stuff of which second terms are made. 'How can we stimulate this economy? Let's try war. Ooops, no good. OK, let's try good old fashioned monetary policy. If we lower interest rates and let our dollar slide we will surely stimulate international demand for our products. Also, our citizens will no longer be able to afford the goods of other countries, so they will be forced to buy local. The low dollar is good.'

So as the Whitehouse pursues its low dollar strategy, the other currencies of the world experience an unexpected, and unwanted, boost.

OK, there are many reasons for the gain in the Canadian dollar (increase in value of primary resources, neutrality position on the geopolitical stage, strong economic fundamentals, impending leadership change) but the fact of the matter is, it is not really our fault. While we have done a few things right, we are not at the helm. All we can do is adjust the sails to make the best use of the southerly gale.

Brent VanParys

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