The Canadian government breathed a sigh of relief on Friday that the Canadian dollar had at least paused in its march towards parity with the US dollar. "Like the governor of the Bank of Canada, we are concerned with volatility in our currency. We are seeing some stability of late, which is to be desired, and so we're all comfortable with that," Finance Minister Jim Flaherty told reporters.
He and Bank of Canada Governor Mark Carney have in the past 10 days voiced concern about too rapid a rise in the currency, which has retreated from around C$1.02 to the dollar, or 98 US cents, on October 15 to C$1.08, or 92.6 US cents, on Friday. Flaherty said that although the central bank does have the ability to try to temper the currency's movements, there are limits to what it can do.
"There's no question longer term that in global terms we're seeing a lot of downward pressure on the US dollar, and that affects all of the market currencies, including the Canadian dollar," he said. "I agree with the governor...that we want to avoid volatility in the currency to the extent we can, and the tools we have are limited in that regard but there are some tools available," he added.
The bank has signalled that in addition to direct foreign exchange intervention, it could engage in quantitative easing, effectively printing money, if it felt the currency's rise was threatening growth so much that inflation would be too low. The bank's Monetary Policy Report last Thursday assumes the Canadian dollar will average 96 US cents, or C$1.0417 per US dollar, through 2011.
Carney said the appreciation of the dollar was a major risk, but he also said the bank's current policy stance - with no quantitative easing or foreign exchange intervention for now - was right. Flaherty said Friday's disappointing gross domestic product numbers for August - a 0.1 percent decline after no growth in July - showed that while there are encouraging signs, economic recovery in Canada is fragile and tentative.
"We expected that we would start to see stability later this year, and we have seen stability in the economy," he said. "Now we're looking forward to seeing evidence of entrenched growth, which I anticipate we will see as we move into 2010, but we have to continue the stimulus package, because that's our protection from sliding backwards,"
Stimulus from the public sector was still necessary since private sector demand was still not growing, he said. While Flaherty said he was encouraged by US third-quarter growth of 3.5 percent, he said he was also cautious because that was partly a reflection of temporary stimulus measures such as the now-expired cash-for-clunkers car purchase plan. He also said he expected employment in Canada to continue to lag growth.
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