The predictions swiftly became self-fulfilling. Influential businessmen and analysts had widely predicted that the yen would gain strength against other leading currencies. And last week, Japanese currency traders began heavy selling of the Canadian dollar, pound sterling and the Australian dollar, all of which had been attractive investments until interest rates attached to notes and bills in their denominations started to fall. As a result, the Canadian dollar’s value against the greenback dropped 1.48 cents last week to 85.27. In August, it had reached a 10-year high of 88.54 cents. Now, most money traders predict that the dollar will slide even further—making importée; wering
Last week’s sell-off occurred even though Bank of Canada governor John Crow’s highinterest-rate policy has kept Canadian commercial lending rates about five percentage points higher than U.S. rates. Late last week, Crow raised the central bank rate to 12.66 per cent from 12.59 to stop the dollar’s slide. But some analysts predicted that the impending recession will eventually force Crow to lower rates again, allowing the dollar to drop further.
There is no agreement on how low the dollar will drop. Grant Matchett, a foreign-exchange technical analyst with Toronto-based Sanwa McCarthy Securities Ltd., says that the dollar will not likely fall below the 82-cent range. But George Vasic, chief economist at DRi/McGrawHill, a Toronto-based economic forecasting company, estimated that the Canadian dollar will be worth only 78 cents if interest-rate spreads between the Canadian and U.S. dollar return to a more normal 2xh percentage points. However, he does not believe that spreads will go this low. Vasic added that a sharp drop in the dollar would fuel inflation,
because it would make imports markedly more expensive, which in turn would force Crow to push interest rates higher again. Declared Vasic: “If the dollar goes into free fall, Crow will have to act.”
Still, even the signs of a downward trend were welcome to Canadian exporters, whose shipments to the United States have stagnated as the cost of their products climbed compared with those of their American competitors. David Fifield, vicepresident of finance for Newfoundlandbased Fishery Products International Ltd., for one, said that each one-cent decline in the Canadian dollar adds $2 million in annual export sales to the company’s revenues. Added James Taylor, president of the Canadian Exporters Association: “Hopefully, the government will not be so ill-advised as to try to keep the dollar at the current level.” But no matter how John Crow reacts, there will be a price to pay.
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