Canada Hit by Overvalued Dollar Some Economists Say Inflation Is Licked and Central Bank Should Lower Interest Rates, Dollar
Fred Langan,, The Christian Science Monitor
THE Bank of Canada's high interest rate policy has kept the Canadian dollar overvalued, economists charge. This, they add, is hurting Canadian manufacturing and making the Canadian recession worse than the downturn in the United States.
"It is overvalued by 6 or 7 cents and should be worth 80 or 81 cents" in US money, says George Vasic, chief economist at the Toronto office of DRI/McGraw-Hill, an economic consulting firm.
Canada's high interest rates attract foreign money, which keeps the Canadian dollar strong. Japanese investors, both private and institutional, are large holders of Canadian government bonds, drawn by interest rates of 10 and 11 percent.
But the 87-cent dollar makes Canadian manufactured products more expensive in key foreign markets.
John Crow, the governor of the Bank of Canada, has said repeatedly that his aim is crush inflation, and he uses the value of the Canadian currency to do it.
Last week the central bank beat back a run on the Canadian dollar by intervening in the foreign exchange markets and avoided raising domestic interest rates further. The dollar had dropped almost a cent after allegations of influence peddling involving federal ministers and public officials.
Money market traders and the financial press termed the central bank maneuver a victory. "Crow praised for keeping rates stable" read the headline on the business page of the Montreal Gazette.
But for some economists it was a hollow victory.
"Interest rates are still too high. This would have been a great opportunity to get the Canadian dollar down," says Douglas Peters, senior vice president and chief economist at the Toronto Dominion Bank. "As long as we have interest rates which are 2 to 3 percent higher than those in the United States, the dollar will remain strong and Canadian manufacturers will suffer."
Meanwhile, economist Vasic says Mr. Crow and the Bank of Canada did the right thing. "He's on the right path. He wants to avoid a sharp rather than a gradual decline in the dollar."
The idea behind keeping the dollar high is to keep inflation low. …