The Loonie and the U.S. $1 Coin

The Loonie vs. the Eagle. (mattkiazyk / Flickr)

By Mathew Katz

The Loonie (that's the nickname for the Canadian dollar) rose to 93.7 U.S. cents yesterday, the highest the currency has been in 10 months. Great! Now Canadians can go south of their border (to Buffalo, N.Y.) and buy cheap clothing with their stronger dollar. Sounds like a fantastic deal, eh?

Well, not so much. As much as we Canadians love the bragging rights associated with having a strong dollar, our economy actually does significantly better when our dollar is down. That's why we've been content to have it hover around 60-80 U.S. cents for the better part of the past few decades.

Jim Flaherty, Canada's Finance Minister, took a stand against the rising dollar yesterday, but declined to say what he'd do about it. He said a lot of the rise was false because of currency traders over-speculating about Canada's economic comeback -- but a higher dollar could slow Canada's rise out of the recession.

Confusing? Well, here's how it works:

Canada's economy is incredibly dependent on trade, especially with the U.S. When the Canadian dollar is worse off, it gives American companies more purchasing power, and so they'll often buy more from Canadian ones. A quick real-life example: my mom works for an advertising company that makes print ads for a whole slew of American products. As a kid, I can remember her complaining every time the Canadian dollar shot up: it would be that much harder to make a sale to a U.S. company the next day.

A low dollar also encourages American companies to invest in Canada. It's what's spurred the growth of "Hollywood North" -- A.K.A. Vancouver, B.C. When the dollar is low, it's cheaper for American production companies to shoot movies and T.V. shows.

But he pointed out another risk of a skyrocketing dollar: volatility. The Loonie rose seven percent in July -- the most among the 16 widely-trade currencies tracked by Bloomberg. In May it rose more than any month on record. With the Canadian dollar's value changing so rapidly, exporters are having a hard time budgeting price quotes for customers.

Last month's Bank of Canada declaration of the recession being over relied heavily on exporters doing well. If the volatile Canadian dollar hurts exporters hoping to take advantage of recovering worldwide demand, it could hurt the entire country.

categories: Canada

10:49 - August 5, 2009

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