In view of the tumultuous events in recent memory, economists should not be surprised by anything.
Nevertheless, the strong U.S. dollar comes as a shock; it is a rare thing nowadays. It should be recognized that the external value of that currency is of crucial importance to Canada.
We are importing each month more than $20 billion in goods from the United States. The recently expensive U.S. dollar has had a tremendous impact on so much of our economy, rising costs on everything from food to capital equipment, and such items as automobiles.
A strengthening U.S. dollar is historically a rare thing. The upward moves early in the 1980s and again in the late 1990s were aberrations from the generally declining U.S. dollar. Ever since the Bretton Woods Agreement more than four decades ago, the U.S. currency has fallen in value against the currencies of other major developed nations.
Inasmuch as trends do not usually proceed in a straight line, some suggest that it is about time for a rebound to occur.
The immediate trigger for the strong U.S. currency is the belief that the U.S. federal reserve’s purchase of bonds with printed money may start to taper in the coming months. The probability then is that the end of so-called quantitative easing would push up interest rates significantly. That would entail a sharp rise in capital inflows there, as capital would flow from riskier nations in the world. That obviously pushed up the U.S. dollar.
Also with the decline in money printing that was part of quantitative easing, the existing dollar would be more valuable.
There are other factors at work, but the U.S. economy is improving. Mortgage rates are falling and the housing industry is responding with a sizable recovery. Non-farm payrolls continue to expand, and GDP growth is stronger, though not at an exuberant rate.
Other nations are not faring as well. Japan remains mired in a recession, but a recovery seems to be underway. Economic conditions in Europe are stabilizing, but still, it fails to attract much investment that would strengthen the euro. While the Chinese economy continues to grow, investment there remains hazardous; the rules and regulation of the Communist Party are not attractive compared to the United States.
Given the above it is not unexpected that the U.S. continues to be a relatively attractive place for investment.
All but forgotten is the precarious state of the U.S. economy – with its overhang of trillions of dollars in national debt, bankrupt cities, unfunded pension funds, and its foreign trading accounts continuing to be several hundred billion dollars short – but that will reassert itself in a year or so.
That will be a boon to our export markets and to the entire Canadian economy.