BUSINESS

The dollar takes flight

Crisis in the Gulf raises Canada’s currency

D’ARCY JENISH September 3 1990
BUSINESS

The dollar takes flight

Crisis in the Gulf raises Canada’s currency

D’ARCY JENISH September 3 1990

The dollar takes flight

BUSINESS

Crisis in the Gulf raises Canada’s currency

Despite strong signals that Canada's economy is faltering, its dollar is soaring to its highest level since July, 1978. The dollar's dramatic ascent—it closed last week at 88.07 cents (U.S.)—was an unexpected result of Iraq’s Aug. 2 invasion of neighboring Kuwait. Apparently fearing the outbreak of war in the Persian Gulf, nervous international investors are eagerly placing their money in safe havens—and they consider the Canadian dollar one of the safest, because the country is less dependent on imported oil than most others in the industrialized world. But many analysts say that a strong dollar, combined with high interest rates, rising oil prices and a resulting higher inflation rate, could plunge the economy into a deep and prolonged recession.

Said Michael McCracken, for one, president of the Ottawa-based economic research firm Informetrica Ltd.: “At the moment, there are nothing but negatives out there in terms of economic growth and employment.”

The military crisis resounded in other financial capitals as well. Concerns about oil shortages drove prices through the $30 barrier last week to

$32.35 (U.S.) per barrel—their highest level since August, 1983—before they fell back to $30.90 per barrel at week’s end. And investors everywhere have been selling risky stocks for safer investments such as dollars, gold and blue-chip shares. The Toronto Stock Exchange

300 composite index alone lost 130.7 points last week to close at 3361.23, while the Dow Jones industrial average slid 111 points, closing the week at 2,532.92. Since Aug. 1, the TSE has lost almost 5.9 per cent of its share value, and the Dow has lost close to 14 per cent, but no exchange has been hit harder than Japan’s, reflecting that country’s total dependence on imported oil. The Nikkei exchange has lost 23 per cent of its share value.

For Canada, the higher dollar has mixed effects. While it will make imported U.S. products cheaper, exporters to the United States—who complained that the dollar was too high even before the Gulf crisis—say that their dwindling profit margins will evaporate if the currency continues to climb. They say that they receive American dollars for exports sales and must convert these to Canadian dollars. As Canada’s dollar rises in value

against its American counterpart, the exporter in this country earns less on his sales, even though volumes remain steady. Said Joseph Cavalancia, vice-president of Exeltor Inc., a Quebec knitting-needle manufacturer that exports 95 per cent of its output to the United

States: “We are not selling any less, but we’re making a lot less profit.”

However, analysts predict that the dollar will fall back if the Gulf crisis is resolved diplomatically and international investors begin refocusing on the country’s underlying economic problems. John Usbome, vice-president of money markets at Toronto-based Rich-

ardson Greenshields Ltd., says that international investors are snapping up Canadian dollars not only because the nation is relatively self-sufficient in oil, but also because interest rates are significantly higher than in the United States. Said Usbome: “That makes the Canadian dollar into a petro-currency.”

The higher oil prices will clearly dampen prospects for a rapid economic recovery. Since the Gulf crisis began, prices have increased by nearly 50 per cent, and some analysts foresee $50 (U.S.) for a barrel of oil if war breaks out, completely disrupting the region’s petroleum exports. Other analysts say that, even if the crisis is quickly resolved, it could still lead to a prolonged period of high energy prices that, on its own, will lead first to inflationary pressures and then higher interest rates. In Calgary last week, former CIA director and U.S. energy secretary James Schlesinger—who now sits on the board of Gulf Canada Inc.—rejected the view that the global oil market will quickly return to surpluses and low prices when the crisis is resolved. Said Schlesinger: “I suspect we are going back to a number of fat years for the oil industry.”

In that case, Bank of Canada governor John Crow would be caught in a policy dilemma. He would have to decide whether to continue his anti-inflation fight with high interest rates and continue the dollar’s current strength, or drop rates and risk an outbreak of rising prices. Last week, Crow lowered the bank rate, which has been falling for eight weeks, to 13.01 from 13.07 per cent. As well, the bank pumped nearly $500 million in Canadian currency into international money markets in an attempt to curb the dollar’s climb.

Indeed, dramatically higher oil prices would increase the cost of living for consumers and manufacturers’ cost of production, which would be only partly offset by cheaper imports. According to McCracken, the combination of higher oil prices and a rising dollar will result in layoffs, plant closures and increased unemployment as manufacturing costs rise and profits dwindle. He added that consumers may gain if a stronger dollar is translated into cheaper prices for imported retail goods. But those gains will be erased if they must pay more for gasoline and home heating. In short, a strong dollar and rising oil prices could deal a double blow to an already unsteady Canadian

economy.

D’ARCY JENISH