Canada's finance minister said on Sunday he accepts that the US dollar will remain weak for some time and considers Canada's rising currency has stabilised, removing for now any need for intervention. The Bank of Canada's warnings on the dangers of a rising Canadian dollar appear to have worked in halting its precipitous rise, Finance Minister Jim Flaherty said in an interview with Reuters on Sunday.
Flaherty suggested that if there was a repeat of the kind of currency volatility seen in Canada in the autumn of 2007, intervention would be warranted.
"If there's too much volatility, then that could warrant action combined by the Bank of Canada with the Department of Finance," Flaherty said on the sidelines of the International Monetary Fund and World Bank annual meetings in Istanbul, Turkey. "Not now. What we're seeing now is relatively stable but if we saw what we saw a couple of years ago - in the fall of 2007 as I recall we saw a great deal of volatility - that kind of thing is very disruptive for business."
The Bank of Canada has not intervened in the foreign exchange market for a decade and stood by in 2007 as the currency surged past parity with the US dollar and hit record highs.
"We spoke about the dollar at that time (2007) and the speculation in the currency seemed to diminish," Flaherty said. When asked if "jawboning" was staving off speculators this time too, he replied, "The dollar right now is relatively stable."
This year, the currency has appreciated by about 20 percent from multiyear lows in March, triggering a series of warnings from Bank of Canada Governor Mark Carney that he could take unconventional measures to prevent the currency from rising further and derailing the economic recovery.
Canada's economy is highly dependent on exports to the United States and the strong currency makes it tougher for exporters to stay afloat. Flaherty acknowledged that the US dollar weakness would likely persist.
"I'm accepting that the US dollar is under downward pressure now and that will likely persist until the United States government addresses their deficit issue," he said.
"IT'S NOT ALL OVER":
Flaherty took every opportunity over the weekend in Istanbul to hammer home a message that the global recovery is not yet guaranteed. He sounded bearish on the Canadian economy too on Sunday.
"I know it seems like it's all over now but it's not all over," said Flaherty, who is set to receive the "finance minister of the year" award from Euromoney on Tuesday.
"I've been quite cautious about economic growth coming out of the recession. I think my views are validated by the July results where we saw economic growth flat in Canada," he said.
That is why, despite improved financial markets, Flaherty extended an emergency program to boost bank liquidity by offering to buy insured mortgages from them. The government last month extended the C$125 billion ($116 billion) program to March 2010 even though bank participation has been dwindling.
Ottawa may also do more to help small and mid-sized companies gain access to credit, he said, noting there were still gaps in the availability of financing.
Despite the Bank of Canada's expectations of a sharp economic turnaround in the second half of this year, Flaherty said withdrawing stimulus spending before the end of the 2010-11 fiscal year is out of the question.
He has no other short-term help to offer exporters pinched by the strong currency. In the longer term, he is counting on planned corporate tax cuts to attract more businesses to Canada.
"This is the hard part of governing, in the sense that one has to just stay the course. There are no magic solutions."