Posted by: Tony Carson | 15 September, 2007

The Tale of Two Bucks

The US buck is dropping while the Canadian loonie (dollar) is rising. What’s up?

Here are notes from two articles on the subject: the US — Shrinking dollar’s mixed blessings; Canada — Economists gird for parity as dollar tops 97 cents

The US

Once the “almighty dollar,” the U.S. currency is flirting with a new nickname: the American peso. Since 2001 the dollar has lost more than half its value against the euro. But the decline against its major rivals is just the most visible sign of the buck’s loss of purchasing power.

In much of the world — from Brazil to Poland to Thailand — one dollar buys less than it did a year ago, and far less than it did four years ago. On Friday, the U.S. currency hit a 30-year low against its Canadian peer.

There’s rarely a single explanation for why currencies rise and fall, but many experts believe that the sliding dollar is largely a function of the nation’s borrowing binge of the last two decades. That has left the U.S. with a yawning trade deficit, and deep in debt to foreigners.

In theory, a currency is supposed to reflect the underlying health of the economy that stands behind it.

“The basic thing is, we have been living beyond our means,” said Ted Truman, a senior fellow at the Peterson Institute for International Economics in Washington.

A dwindling dollar is, in effect, the marketplace’s attempt to slow those trends, Truman said — an effort to get Americans to buy less Italian rigatoni, for example, and more of the domestically produced stuff.

The flip side of a weak dollar is that it makes U.S. goods less expensive for foreign buyers, boosting the fortunes of American exporters such as Frank Robinson.

The nation shipped a record $137.7 billion worth of goods and services abroad in July, 15% more than in July 2006, government data show.

Even so, Americans’ purchases of imports — including foreign oil — still far outstrip what U.S. companies export. Imports reached $196.9 billion in July, up 5% from a year earlier.

The gap between imports and exports is the trade deficit. The broadest measure of the U.S. trade picture is the so-called current account, which includes investment flows. The deficit in the current account reached a record $811 billion last year, more than twice what it was as recently as 2001.

Among economists, the widespread view is that the dollar will keep declining. Some believe, however, that the trend could speed up.

If the dollar loses value too quickly, it could wreak havoc on the economy and financial markets — driving up interest rates and inflation and slashing Americans’ purchasing power, said Peter Schiff, who heads money management firm Euro Pacific Capital in Darien, Conn.

Canada

The Canadian dollar topped 97 cents (U.S.) Friday for the first time in 30 years, riding favourable sentiment in global currency markets that economists believe could put it on par with its American counterpart in a matter of months.

But a rise of three more cents to parity would also put further pressure on the Canadian economy, already coping with a 14-per-cent jump in the loonie this year that’s rattling every sector and knocking the wind out of this country’s export businesses.

A one-for-one exchange rate is also expected to spell relief for Canadian consumers, putting pressure on businesses to cut the price of goods in keeping with the stronger purchasing power of the loonie. A recent report suggested Canadians are already paying roughly 10 per cent more than are Americans for the same goods — and its author says he hasn’t seen much change yet.

he loonie’s latest rise has been driven by bullishness about Canada due to soaring prices for energy and other commodities it exports, as well as investor concern about the U.S. economy.

Currency watchers said it’s possible the loonie may hit par with the U.S. dollar this year.

But parity is a mixed bag.

Canadians vacationing and shopping in the United States will rejoice if the dollar reaches par, but tourist operators in Canada, already suffering from new U.S. customs rules, will lose more American business.

And the surging Canadian dollar, which over five years has increased in value by 56 per cent from a low of less than 62 cents in 2002, is forcing some exporters, previously thought to be uncompetitive above 80 or 90 cents, to reinvent or die.

The dollar’s ascent hits all exporters, but particularly goods manufacturers and producers of resources such as lumber that are not profiting from the commodity-price boom benefiting oil and metals.

Ontario plant closings have climbed to 125 in the first quarter of 2007 from 32 in all of 2006 and 37 in 2005. Manufacturers’ cost-competitiveness started to erode when the dollar hit 82 cents (U.S.), he said, a point that forced many to consider exiting the market or reinventing themselves.

Exporters who will be left standing after the economy adjusts to a stronger dollar are those whose products are in demand not because they are a bargain but because they’ve got a specialized niche product that commands sufficient global demand, he added.

Economists said it’s far from certain that the Canadian dollar would remain at parity for very long; if currency markets regain some measure of confidence in the U.S., the loonie could easily lose ground.

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