Canada Dollar May Rise to 80 U.S. Cents, Manley Says (Update1)
(Updates price in fourth paragraph.)
By Kevin Carmichael
Feb. 25 (Bloomberg) -- Canada's dollar may extend its
advance against the U.S. currency, reducing the pace of economic
growth and eroding revenue at exporters, former finance minister
John Manley said in an interview.
``I don't see it going below where it is now'' and a gain to
80 U.S. cents is likely, said Manley, 54, who steered Canada's
finances for a year and a half before resigning in December. ``A
lot of businesses are really hurting, just as I feared.''
The Canadian dollar has climbed 13 percent in the past year,
slowing the rate of economic expansion to 1.6 percent in 2003,
based on a government estimate, half what Manley forecast in his
only budget speech last February. The currency's surge has also
reduced the amount companies earn from exports. Alcan Inc., the
world's largest aluminum maker by revenue, said the dollar's rise
reduced 2003 profit by $56 million.
Against the dollar, the Canadian currency fell to 75.13 U.S.
cents at 9:38 a.m. in London, from 75.22 late yesterday. The
currency is down from 78.85 U.S. cents on Jan. 9, the highest in
more than a decade.
Economists at Toronto-Dominion Bank this month raised their
forecast for the dollar to 79 cents by the end of 2004. The
average prediction of the country's five big banks is 78 cents.
Only Canadian Imperial Bank of Commerce, with a forecast of 73
cents, foresees a decline.
The dollar's increase will ultimately be good for the
economy, Manley said from his corner office on the main floor of
Canada's parliament building on Feb. 9. A tax lawyer who lost
last year's ruling party leadership race to Prime Minister Paul
Martin, Manley will quit politics at the next election.
`Pressure Is On'
Manley resisted saying much about the dollar when he was a
senior minister. When he did, it moved the currency.
The dollar fell 0.5 percent on March 13, 2002, after Manley,
newly appointed as deputy prime minister, said companies were
using a then 62-cent dollar as a crutch. He said many would go
out of business if it rose to 80 cents, a level unseen since
1993.
``The pressure is on firms to invest in productivity
enhancements and to be competitive and that is going to continue
with a dollar at 75 to 80 cents,'' Manley said in the interview.
``There are some that hope'' the currency will fall to the 60-
cent range, he said.
Vancouver-based Canfor Corp., the country's largest lumber
producer, said on Feb. 5 that the Canadian dollar's gain reduced
revenue by C$250 million last year.
Bombardier Inc., the world's biggest maker of train cars and
small jetliners, said in December it had to shave C$115 million
off the original C$1.23 billion sale price for its recreational
vehicle unit because of the dollar's appreciation.
Eliminating Jobs
Canadian exporters increased shipments abroad by 3.6 percent
in December, government figures show, even as the dollar traded
at an average rate of 76.2 U.S. cents. At the same time,
companies are cutting prices to keep customers and Canadian
factories are reducing payrolls. Manufacturers shed 57,300 jobs
last year.
Manley said he plans to work as a consultant, advising
companies on investment decisions. Before then, he will complete
a review of Ontario Power Generation Inc., a state-owned
electricity generator.
The Ontario government has asked him to assess whether the
refitting of idled nuclear reactors at Ontario Power should
proceed. The company estimates the cost at C$1 billion this year.
Machinery Investment
To cope with a stronger dollar, Canadian companies should
invest in better machinery to increase productivity, Manley said.
At the time he left the cabinet, Manley said he was working on
tax changes that would encourage companies to spend money on new
equipment.
Manley and his successor, Ralph Goodale, spoke ``a couple of
times'' and have ``similar'' views, Manley said later through a
spokesman, Jon Timlin.
Canadian imports of machinery and equipment rose 5.1 percent
last year and employment increased 1.7 percent, according to
government figures, suggesting executives are boosting production
by retooling instead of adding workers. About 80 percent of the
machinery Canadian companies import comes from the U.S.
In government, Manley said the dollar's rise was
attributable in part to what he called ``sound fundamentals'':
the budget is in surplus, the country is selling more goods
abroad than it is purchasing and the economy is growing.
Demand for the U.S. dollar fell as the Federal Reserve has
kept its target interest rate at a 45-year low of 1 percent since
June 24. Of the 16 major currencies tracked by Bloomberg data,
only the Mexican peso, with a decline of 1.4 percent, has dropped
versus the U.S. dollar during the past 12 months.
Rate Reductions
After three reductions since July, the Bank of Canada's
benchmark rate is 2.5 percent, still 1.5 percentage points higher
than the U.S., and greater than the European Central Bank's 2
percent. Among the Group of Seven major industrial nations, only
the Bank of England has a higher rate at 4 percent.
Canada's 3 1/2 percent note maturing in December 2005
yielded 2.39 percent at 5 p.m. in Toronto Tuesday. The U.S.
Treasury note of similar maturity yielded 1.64 percent. Two-year
German debt yielded 2.28 percent.
Manley's comments echo Bank of Canada Governor David Dodge.
Speaking in Mexico City on Feb. 17 and Montreal on Feb. 11, Dodge
said companies should use the higher dollar to make upgrades
because it reduces the cost of computers and other equipment
built abroad.
``Just as businesses reacted to signals of a weaker Canadian
dollar in the 1990s, they should now respond to the signals of a
stronger currency,'' Dodge said in Montreal.
--Editors: Schatzker, Erman, Moss, Wolfson
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To contact the reporter on this story:
Kevin Carmichael in Ottawa at (1) (613) 231-1082 or
kcarmichael@bloomberg.net. |
