14 June 2007

 

 

 

The governor of the Bank of Canada suggested yesterday the Canadian dollar's recent surge may have gone beyond levels supported by economic fundamentals -- but repeated that interest rates may still have to increase to restrain stronger-than-expected growth and inflation.

 

The delicate balancing act from David Dodge fell short of verbal intervention to talk the currency down, analysts said….

 

Mr. Dodge said the loonie has moved well beyond the US86.5 cents to US89.5 cents range expected in its April update and it has been significantly stronger than other major currencies against the U.S. dollar.

 

"Much of this appreciation can be linked to such factors as the strength of demand for Canadian goods and services, continuing firm prices for commodities and a positive outlook for Canadian economic growth," Mr. Dodge said….

 

The comment indicates the bank thinks the currency's latest jump may not be driven entirely by the kind of economic fundamentals that would also drive growth -- such as strong commodity prices -- so it could act as restraint on the economy….

 

At the same time, Mr. Dodge also pointed out inflation has been stronger than anticipated, service prices continue to run well above 2%, prices for goods have been higher than expected and there is an increased risk future inflation will persist above its 2% target.

 

In the bank's May statement, it said "some increase in the target for the overnight rate" may be needed to bring inflation back into line. It was how Mr. Dodge concluded his speech yesterday in St. John's -- and pointed that out at a later press conference….