Diverging policies

A key to understanding current economic trends can be found in the diverging policies of central banks, graphically revealed in worldwide currency movements.

The U.S. dollar climbed to a multi-year high, with further strength forecasted.

That suggests the U.S. Federal Reserve will raise interest rates before its counterparts do, further bolstering the U.S. dollar.

Recently the U.S. dollar reached its highest level in several years in response to data that U.S. economic growth accelerated. Consequently, job hiring surged and concomitantly unemployment levels declined.

These trends run counter to longer-term logic as a higher valued U.S. currency will exacerbate its foreign trade account with the rest of the world. As the dollar rises, that means exports become more costly and the U.S. deficit in its trading account has been running at hundreds of billions of dollars each month.

Too, the world seem to ignore the U.S. budget deficits that are intractable, in view of the dysfunctional governments with Congress there stalemated.

The total U.S. national debt, in excess of $17 trillion, appears to be all but ignored for the time being. In the longer term, of course, these mitigating factors will entail a changed outlook for the U.S. economy and its dollar.

The implications for Canada are mixed. A strong U.S. dollar means that our commodities that are priced in U.S. dollars will decline in price, notably our oil, agricultural prices and mining output. Also, a strong U.S. dollar enables Canada to export more to that nation as our products appear cheaper. The automobile trade should benefit enormously, as will our raw materials.

The strong U.S. dollar reflects the gathering strength of the U.S. economy that should draw in more Canadian goods.

However, in the early 1960s, when Prime Minster Diefenbaker tried to ameliorate the situation,  devaluing our dollar to U.S. $0.925, he was subsequently (and incorrectly) ridiculed by the Liberal Opposition.

The Bank of Canada recently stated that it is in no rush to raise interest here and can and will diverge from the United States’ policies until our economy shows considerably more strength.

Other nations such as the Japanese and the Eurozone currencies likewise will refrain from raising interest rates until all the economies become significantly more buoyant.

Hence, over the near term the stronger U.S. currency will help our economy, although our exports denominated in U.S. dollars will decline in price.

Thus, temporarily Canada’s exports will continue to grow in volume and that will help our economy.

Later danger lurks ahead for the United States.



Bruce Whitestone