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Economists ponder swapping loonie for U.S. dollar
STEVE ERWIN
TORONTO (CP) - I'll trade you two John A. Macdonalds for an Alexander Hamilton. Such $10 swaps aren't imminent, but they're not out of the question, say economists pondering whether at some point Canada's loonie should just fly south and stay there.
Dollarization - abandoning Canada's currency and adopting the U.S. greenback, leaving decisions on monetary policy with the U.S. Federal Reserve Board - won't happen soon.
But at least one economist says it's inevitable if the Canadian dollar, now within a penny of its all-time low of 63.09 cents US, continues its long decline into the range of 50-something American cents.
"I don't mean tomorrow. But if this trend continues - and I see no reason why it shouldn't - then in another five or six years we'll have a five-handle on the currency," says Jeff Rubin of CIBC World Markets.
Rubin has been sounding the alarm that the further Canada's currency slides against the American dollar, the further Canadian assets will deteriorate in value.
"There will only be dollarization if the Canadian dollar continues to devalue, because what will spur dollarization is a loss of confidence in the currency," he says.
"People are going to ask themselves, what's the benefit of having a national currency if it just makes us poorer?"
Dollarization isn't a new concept. In Latin America, El Salvador and Ecuador have adopted the U.S. dollar in recent months. Earlier, Argentina pegged its peso one-to-one with the greenback in 1991 to stamp out hyperinflation.
"For some of the emerging economies, it's a way of getting some credibility," says Royal Bank chief economist Craig Wright.
However, the Bank of Canada has been successful in keeping inflation low and Canada's fiscal policy has "turned around quite sharply," Wright says.
"The credibility that Argentina needed, we don't."
The benefits of dollarization, some argue, lie in the ability to make investment and trade decisions across North America without worrying about currency fluctuations.
Others say Canada would attract more foreign investment - the way investors run for cover in the U.S. dollar during fears over the global economic outlook.
But Canadians would also be left to rely on the Federal Reserve to set monetary policy - an idea that's attractive to those who have questioned the Bank of Canada's monetary competence over the years.
Then again, the Canadian economy would be tied to the strengths and weaknesses of Uncle Sam.
"Even though we are so similar and we do have such great ties to the United States, I just can't see us bending and giving in," argues Steve Butler, director of foreign exchange trading at Scotia Capital Markets.
"At that stage, we'd be giving up so much of our independence. I don't think there's a real need for that."
The currency's weakness is a political matter, he adds: "If the government didn't want to have a weak dollar, it wouldn't have a weak dollar. A lot could be done to shore it up, but the perception is that's not the mandate of the current government."
There are advantages to the current floating exchange rate, especially in helping the economy adapt to surprises like the Asian crisis that hit commodity prices in 1997-98, says TD Bank economist Marc Levesque.
"Taking away the buffer the exchange rate provides will eventually translate into other adjustments occurring which could be even worse than seeing the currency plummet."
Levesque acknowledges, however, that the economies of Canada and the United States are evolving in the same direction. Canada is becoming less dependent on commodities - whose prices often impact the loonie's value - as it turns away from reliance on resource industries to a new economy of services and high-tech growth.
"We're coming a little bit closer to the structure of the U.S. economy," he says.
"That is something that maybe 20 years down the road might make the issue of dollarization much more feasible. But for the time being, it's a no-go."
© The Canadian Press, 2001 |
