Canada and the US Dollar

[dr. what]

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The Canadian dollar broke through 84 cents (U.S.) Monday, hitting a fresh 12-year high against its U.S. counterpart as global currency markets continue to fret over that country's ballooning budget and trade deficits.

In morning trading, the loonie moved as high as 84.01 cents (U.S.), its highest level since August, 1992.

As the session wore on, it pulled back somewhat, at last check trading at 83.84 cents, up 0.34 cents from Friday's Bank of Canada closing price.

Last week alone, the Canadian dollar jumped 1.7 per cent. Over the past three weeks, the loonie has gained nearly 5 per cent against its the U.S. dollar.

“The Canadian dollar is now up 8.2 per cent so far in 2004, behind only the South African rand's 9.7-per-cent rise among major currencies,” BMO Nesbitt Burns senior economist Douglas Porter said.

“This is now threatening to be the Canadian dollar's second strongest year on record behind only 2003. That second place honour is currently held by 1988, when the Canadian dollar rose 9 per cent.”

Last year, the loonie soared 21.7 per cent.

The most recent gains for the loonie came after last week's U.S. election. Heading into the vote, many traders had expected the re-election of George W. Bush to trigger a rally in the greenback.

But global concern about imbalances in the U.S. economy prevailed, sending the U.S. dollar lower against other major currencies.

On Monday, the U.S. dollar touched a record low against the euro.

At one point in the session, the yen moved to a seven-month high against the U.S. dollar, prompting speculation that the Bank of Japan might intervene to temper that currency's rise, something it hasn't since early this year.

Following a meeting in Switzerland, European Central Bank president Jean-Claude Trichet expressed concern Monday about the growing strength of the euro, calling the current rally brutal and unwelcome.

“The recent moves, which tend to be brutal on the exchange markets between the euro and the U.S dollar, are not welcome from the standpoint of the ECB,” Mr. Trichet said after a meeting in Basel, Switzerland, according to Associated Press.

Over the past week, the Australian dollar rose 1.9 per cent against the U.S. dollar, while the euro advanced 1.3 per cent. The pound rose 1 per cent. Gains by the yen where held to 0.2 per cent.

With this week's strong start for the loonie, Mr. Porter said, a “reasonable, medium-term target that is beginning to crop up on the horizon” is the 1991 high of 89.40 cents.

The greenback's current struggles will likely persist later this week, when the U.S. government releases its report on the size of the nation's trade deficit in September. Economists expect the deficit to hold at $54-billion (U.S.), matching the previous month's figure. If forecasts hold, the September number would be the second biggest on record.

The U.S. trade deficit hit its high-water mark in June, topping out at $55-billion.

Meanwhile, the U.S current account deficit — the broadest measure of its dealings with the rest of the world — was at an annual rate of $665-billion in the second quarter, which was 5.7 per cent of U.S. gross domestic product.

On Sunday, meanwhile, Bank of Canada Governor David Dodge told reporters the Canadian dollar's recent showing wasn't a surprise, given market conditions and so far it has not harmed exports.

He said the central bank will consider very carefully the currency's impact on growth at its next meeting in December but also suggested that, so far, the strong gains in the Canadian dollar are not out of line.

“We have seen major strength in commodity prices. We have seen reasonably good growth in our markets. So it is not by any means inappropriate for an exchange rate to move in those circumstances," Mr. Dodge told reporters on the sidelines of the central bankers' meetings on global markets and the economy in Basel, Switzerland.
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At this rate, it could theoretically be on a 1:1 basis by the end of next year.

[J]

There was a time when the Canadian dollar was worth more than the US greenback, or so my parents tell me. As it is, this is about as high as I've ever seen the Canadian dollar, the highest which I can recall was around 86 cents US way back when I was barely out of diapers.

[Glocksman]

The weak US dollar is both good and bad.

It's bad because energy imports now cost more.
It's good because US exports now cost less

It's good because more expensive imported goods may drive consumers to US made goods.
It's bad because more expensive imports can ignite a round of inflation.

All in all, its a mixed bag.

[Darth Wong]

There is no such thing as "US made goods" any more. Parts for automobiles, for example, come from all over the place even if the resulting car is supposedly made in America. It's a global economy now, and stability of currency values is a big part of the stability of the global economy.

[SirNitram]

There is no inflation. The poor exchange rates are committing suicide at the gates of the stock exchange. If any existed, which they don't. Emperor Dubya is slaughtering the foreign currencies to a franc, God Willing.

[Glocksman]

I'll rephrase then: "US assembled goods".

The point is that a long term (short term gyrations don't do any good for anyone other than currency speculators) weakening of the US dollar renders US exports cheaper to the rest of the world. This is a good thing as it helps reduce the trade deficit and increases employment in those industries that export.

The problem is that a cheaper dollar also makes US imports of vital goods (the parts you mention and oil, for examples) more expensive. This isn't good.

A long term weakening in the dollar is a mixed bag in its effects on the US economy, not a completely bad thing.