The dollar’s falling fortunes

Ross Laver March 4 1985

The dollar’s falling fortunes

Ross Laver March 4 1985

The dollar’s falling fortunes



Ross Laver

For economists it was a phenomenon that defied all conventional wisdom. For Canadian manufacturers and retailers it was a mixed blessing that fuelled demand for exports while making imported goods more expensive. And for consumers it was a dangerous development that pushed interest rates higher and threatened to set off a new round of inflation. Bruised and weakened, the falling Canadian dollar last week provoked major concerns about the health of Canada’s economy and its prospects for continued growth.

International money markets rarely experienced such a frenzied week of trading as speculators raced to buy strong American dollars. In just four days the Canadian dollar plunged 2.6 cents to close at a record low of 72 cents against the supercharged U.S. greenback on Friday. As traders barked orders to keep ahead of the slide, some experts predicted that the dollar would sink to the once-inconceivable 70-cent level. Said Barry Wainstein, head corporate trader for New York-based BankAmerica International: “It is a crazy market. The extent of movement in the Canadian dollar in the past three days has been equivalent to what we normally see in six months. Who knows what will happen next week?”

Outflow: With pressure mounting, Finance Minister Michael Wilson attempted to reassure international investors. With his support the Bank of Canada raised its bellwether lending rate to 10.95 per cent from 10.48 per cent, a move that resulted in higher mortgage and loan costs for consumers. When that action failed to stop the outflow of capital to the United States the central bank intervened in short-term money markets by selling treasury bills with high interest yields, making the dollar more attractive but reinforcing the upward trend in borrowing costs.

In addition, Ottawa borrowed a total of $1.4 billion (U.S.)—an amount roughly equal to half the nation’s entire reserves of U.S. currency at the end of January—from a consortium of private Canadian and international banks to buy Canadian dollars and shore up the currency’s value. Still, most market watchers doubted that the central bank’s efforts would do more than halt the dollar’s slide temporarily. Declared

one Toronto currency trader: “The atmosphere here is frantic. Nobody has ever seen it like this before.”

The Canadian currency’s problems were mirrored in most other major Western nations. The rocketing greenback hit all-time highs against the British pound, French franc and Italian lira, 13-year highs against the West German mark and Dutch guilder and a sevenyear high against the Swiss franc. At the same time, President Ronald Reagan brushed aside calls to restrain the dollar’s rise, adding that other countries have only themselves to blame for the weakness of their currencies. Reagan

pointed out that the robust U.S. economy grew by 6.9 per cent in 1984 and he declared: “Our trading partners in the world have not yet caught up with us in the economic recovery. What we really need is their economies to bring their money up in value comparable to ours.” Fragile: In Ottawa, Wilson faced a storm of criticism as the dollar sank. “The Tories promised that if we elected them, there would be a new vitality in the economy, a brand-new confidence in Canada,” said New Democratic Party House Leader Ian Deans. Instead, he told Maclean's, the central bank’s decision to raise interest rates would further unsettle the already fragile economy and add thousands more to the

unemployment rolls. Added Deans: “I really do not know how [the Conservatives] can look at themselves in the mirror each morning. They have no shame.” For his part, Liberal finance critic Donald Johnston said that the dollar’s fall was caused partly by the Tories’ lack of success in attracting foreign investment. Declared Johnston: “The thing that worries me is the confusion and uncertainty that a falling dollar sows in people’s minds. If it leads to a run on the dollar, that would be terrible.” In fact, Wilson’s response to the falling dollar was remarkably similar to actions taken by previous Liberal fi-

nance ministers. Last June, when the Canadian dollar slipped to a new low of 75.90 cents against its U.S. counterpart, Conservative politicians accused the government of pursuing policies that weakened the currency and then raising interest rates to support it. At the time, Tory finance critic John Crosbie, now the justice minister, predicted that Canada was in danger of becoming a “South American banana republic” because of its currency. Said Crosbie: “We cannot afford to have a dollar that is continually sinking.” But Tory Leader Brian Mulroney said during the election campaign that faced with a choice between higher interest rates and a weakening dollar, he would let the dollar slip. Wilson him-

The greenback^ weak sisters

self, while he was in opposition, called for the resignation of Bank of Canada Gov. Gerald Bouey because of the central bank’s policy of pushing up interest rates to protect the dollar.

Upward: Last week it was Wilson’s turn to defend an upward move in bank rates. “No other policy makes sense,” the finance minister told reporters. He also denied that he and Bouey had disagreed on the central bank’s handling of the dollar and interest rates. “The governor is undertaking monetary policy according to his best judgment,” Wilson said, “and I support the actions that the governor has taken.” Later, during a visit to New York to urge U.S. businesses to invest in Canada, Wilson said that there was little his government could do. He said: “We are just hoping that it will settle away. It always does. It may even happen tomorrow.”

Canadian consumers have a direct stake in the future of the dollar. About 70 per cent of Canada’s $80 billion in annual imports comes from the United States, and each time the dollar falls the cost of purchasing those products increases. Even goods from Far East markets become more expensive because they must be paid for with U.S. dollars. Explained Keith Dixon, president of the Canadian Importers Association Inc.: “If you eat grapefruit, buy ballpoint pens or take a holiday in Florida, you will be hurt.” Still, some food industry spokesmen predicted that, for a while at least, U.S. growers will probably absorb some of the losses caused by accepting payment in a weak Canadian dollar rather than pass them along to Canadian shoppers. Said Anthony Arrigo, president of F.G. Lister and Company Ltd., a food wholesaler in Ontario and Quebec: “If you think that the price of fruit and vegetables is going to skyrocket, you are wrong. It will not.” Gains: Some Canadian businesses stand to make gains from a weakened dollar. Firms that export lumber, metals and wheat welcome lower currency values as an opportunity to make shortterm profits. That is because most commodities are priced in U.S. dollars, so that any increase in the greenback’s value adds to the earnings of Canadian producers. Glen Ferguson, treasurer and vice-president of Vancouver-based MacMillan Bloedel Ltd., estimated that last week’s fall in the Canadian dollar annually would yield an extra $30 million to $40 million for his company. MacBlo’s major owner, Noranda Inc., a Toronto-based mining company, will also gain because the world price of copper and other metals is set in U.S. funds. Said Noranda chairman Alfred Powis: “I wish it would not happen this way. But we will gain from this.” Other winners include Molson Companies Ltd. of Montreal and Moosehead Breweries

Ltd. of Saint John, whose U.S. sales have soared ever since the Canadian dollar began tumbling in the late 1970s.

On balance, however, there are many more losers than winners. And a major reason is that over the long term a devalued dollar adds to the inflationary spiral as the cost of U.S. imports rises. Declared James Webber, an economist with the Toronto Dominion Bank: “It is a fool’s paradise.” Many private and public corporations have U.S. debts, which cost more to repay every time the Canadian dollar falls. Ontario Hydro, Hydro-Québec and B.C. Hydro all pay interest in U.S. dollars for bonds that they sold to American investors in the late 1970s. Said Tony Gouveia, at B.C. Hydro: “A one-cent decline in the Canadian dollar means $13 million a year to B.C. Hydro.” Even professional sports teams suffer because many of their players’ salaries are negotiated in U.S. dollars. Said Pat Gillick, executive vicepresident of baseball operations for the Toronto Blue Jays: “If the dollar falls one cent, it costs us $185,000.” Irresistible: Despite drawbacks of a cheaper currency, many economists said that it would be unwise for Ottawa to try to stop the dollar’s fall. Said Jack Carr, a University of Toronto economist: “The pool of capital available on international money markets is about two trillion dollars. By that standard, the $500 million (U.S.) that the Canadian government borrowed from international banks [at midweek] to smooth the dollar’s slide was peanuts. The Bank of Canada should maintain a hands-off policy and simply let the market take its course.” Said currency trader Wainstein: “What the markets have decided is that there is no way the Bank of Canada can defend the currency. If it had $5 billion to defend the dollar, all well and good. But it does not.”

The strength of the U.S. currency is based on low inflation and a booming economy, coupled with relatively high interest rates. This makes Canada’s southern neighbor an attractive place for investors to put their money. Explained John McCallum of the University of Manitoba’s department of administrative studies: “The world is convinced that the United States is the most desirable market to be in right now. Capital has no politics—it goes where the return is highest.”

The U.S. dollar’s rapid rise has also made it irresistible to speculators, who buy and sell currencies for profit as though they were stocks or pork bellies. As buyers enter

the market in the expectation that the spiral will continue, the trend acquires momentum. Said Leslie Richman, a financial futures specialist with the Chicago Mercantile Exchange: “It is big business for everybody—banks, businesses, the dentist in Des Moines. People who want to speculate can do so in currency or corn.”

_ For most Americans

the results of that speculative burst are almost entirely positive: cheaper imports, lower inflation and inexpensive vacations to Europe, Mexico and the Far East. Still, some Americans do suffer. Farmers and manufacturers have discovered that the dollar’s vigor makes their products less competitive against imports. Last week Sam Gibbons, a veteran Democrat and chairman of the House of Representatives Ways

and Means Trade Subcommittee, told a group of Canadian businessmen that the high-flying dollar “is making it difficult for big business to [decide whether] to build new plants in the U.S.” At the same time, the flood of imports has produced a wave of protectionist sentiment as congressmen try to protect domestic industries.

Overvalued: Economic forecasters, many of whom have mistakenly predicted for the past year that the U.S. dollar would fall, have given up trying to foretell when the tide will turn in international currency markets. But most experts remain convinced that the U.S. dollar is overvalued, and they say that when the market does finally reverse itself Canada’s dollar will be swept upward. In the meantime, there is nothing Canadians can do but follow Wilson’s advice and wait for the dollar to regain its strength. As Webber put it: “If the Canadian currency was the only one being banged about, I would worry. But a lot of others are suffering, too.”

With Ian Austen in Washington and correspondents ’ reports.

Ian Austen