6 August 2009

Flaherty considers steps to slow dollar's rise

The following is excerpted from today's edition of "globeandmail.com".

Finance Minister Jim Flaherty is taking a stronger stand against currency traders, blaming speculators for at least some of the foreign-exchange volatility that is hampering Canada's economic rebound.

...Mr. Flaherty raised the possibility of government intervention to ease the loonie's ascent, saying “rapid” changes in the value of the Canadian dollar against its U.S. counterpart make it difficult for exporters already facing a collapse in global trade.

“We watch that,” Mr. Flaherty said of the currency's volatility. “There are some steps that could be taken to dampen that....

The minister declined to say what those steps might be, and several analysts said they were skeptical that Mr. Flaherty was issuing anything more than idle threats.

Still, the comments appeared to have some effect. The Canadian dollar rose as high as 93.7 (US) cents Tuesday, the highest in 10 months, then tumbled almost a cent to 92.9 (US) cents.

“Just as markets seemed prepared to wrap [the loonie] in a warm embrace, Ottawa provided a decidedly chilly rejection of such amorous intentions,” David Watt, a currency strategist at RBC Securities in Toronto... “This shows a bit more concern than Flaherty has expressed of late, if only by musing on policy options.”

Mr. Flaherty joins Bank of Canada Governor Mark Carney in voicing concern about the dollar, a subject neither embraces with enthusiasm because both are averse to commenting on what transpires in financial markets....

Canada's dollar rose 7 per cent in July, the most among the 16 most widely traded currencies tracked by Bloomberg, after falling 6.1 per cent in June. In May, it rose more than in any month on record.

That kind of volatility is unprecedented and is making it extremely difficult for exporters to budget to compete for orders that already are hard to come by because of the deepest global recession since the Second World War.

The Bank of Canada's forecast that Canada's gross domestic product will resume growing this quarter is prefaced on exporters being able to take advantage of steadily increasing demand in the U.S., China and other parts of the world.

But the Canadian government's traditional aversion to tampering in currency markets is hurting Mr. Carney's and Mr. Flaherty's efforts to convince traders they are serious about intervention if the currency's rise continues to take a toll on the economy.

The Bank of Canada, which acts as the government's agent in currency markets, hasn't intervened in foreign exchange markets since 1998 and the central bank's policy is to do so only in the “most exceptional” circumstances.

“These are comments from a politician trying to find a way to express himself on the currency when everyone knows there's nothing he can do about it,” said François Barrière, vice-president of business development, foreign exchange and international services at Laurentian Bank in Montreal. “I don't think the market believes they want to do it.”