BUSINESS.

A high-flying loonie?

Foreign investors expect the dollar to keep rising

D’ARCY JENISH February 24 1997
BUSINESS.

A high-flying loonie?

Foreign investors expect the dollar to keep rising

D’ARCY JENISH February 24 1997

A high-flying loonie?

BUSINESS.

Foreign investors expect the dollar to keep rising

D’ARCY JENISH

Jeffrey Armstrong keeps three clocks on his office wall. One gives him the local time, while the others are set to the time in Moscow and Tokyo. The clocks, says Armstrong, president of DAC International Inc., an Ottawaarea maker of prefab homes, reflect the fact that his company does all of its business outside Canada—20 per cent in Europe and Russia, the balance in Japan. These days, that means Armstrong must also keep a close eye on international currency markets. For months, the Canadian dollar has been rising against many of the world’s leading currencies—particularly the Japanese yen. If the trend keeps up,

DAC’s products could become too pricey for Japanese buyers. “Over the long term, an increase in the Canadian dollar could definitely have an impact on our business,” Armstrong says. “We could start to lose business to American and Scandinavian competitors.” That has not happened yet, but Armstrong may soon start feeling the heat. Many economists predict that the Canadian dollar, which has been trading between 72 and 74 cents (U.S.) for the past two years, will rise as high as 78 cents by the end of 1997. Those forecasts are based on bullish assumptions about economic growth— Canada’s economy is widely expected to outperform the rest of the industrialized world this year—as well as low inflation, low interest rates and continued progress in reducing government deficits. If the Canadian dollar were to soar even higher—to 80 cents—Canadian exporters of raw materials and manufactured goods would struggle to compete in the all-important American market. “I hope the dollar doesn’t appreciate much higher than 74 or 75 cents,” says Jayson Myers, chief economist of the Toronto-based Alliance of Manufacturers and Exporters Canada. “If it went to 80 cents or beyond, it would be very troublesome.” The U.S. greenback itself has been gaining ground against other foreign currencies—which is why exporters who depend on sales to Europe or Asia are at risk of losing business. Since May, 1995, the U.S. dollar has appreciated more than 50 per cent against the Japanese yen and almost 25 per cent against the German mark. In Berlin on

Feb. 8, finance ministers and central bankers from the Group of Seven countries issued a communiqué intended to arrest the dollar’s rise against those currencies. “The Japanese began to worry that the yen was too weak and the dollar too strong,” says Ted Carmichael, an economist and director of research for J. R Morgan Canada in Toronto. “The G-7 ministers are trying to talk the cur-

PICKING UP THE PACE

The Canadian dollar as measured In selected foreign currencies, monthly average rates

800

vs. the Japanese ven

rency markets into halting the appreciation of the dollar.”

Like many analysts, however, Carmichael believes that the dollar’s rise will continue. In the wake of the Berlin meeting, analysts argued that the strength of the dollar and the weakness of both the mark and the yen were justified in light of economic conditions in those countries. Sherry Cooper, chief economist with the Toronto-based brokerage Nesbitt Burns Inc., said that, with a jobless rate of 5.4 per cent, the United States is essentially at full employment, and has enjoyed stronger growth during the 1990s than any of its G-7 competitors. By comparison, unemployment in Germany now stands at 12.2 per cent, the highest level since Adolf Hitler took power in 1933. Japan, « meanwhile, is afflicted with t; high government deficits, an I underperforming stock market I and a deeply troubled banking 1 sector. ‘The reason the U.S. 3 dollar is so strong is the really 1 positive fundamentals in the « American economy, compared with Germany and Japan,” said Cooper. “And no amount of jawboning by the finance ministers is going to change that.”

For Canadian exporters, the key issue remains the Canada-U.S. exchange rate. Last year, the Alliance of Manufacturers and Exporters surveyed its 7,500 members and found that 85 per cent of them expected to stay competitive in the American market as long as the Canadian dollar remains below the 80-cent threshold. A similar study by the Toronto-based Automotive Parts Manufacturers Association concluded that its members could continue to export profitably until the dollar hit 82 cents. “The value of the dollar is always a genuine concern to us,” said Peter Mateja, president of the parts association, “considering that over 85 per cent of our production goes south of the border.”

A continued rise in the value of the Canadian dollar would have some beneficial consequences. The cost of imported goods would fall—helping to constrain inflation— and Canadians who travel outside the country would find that their money goes further. Still, the damage that a stronger currency would do to exporters leads some economists to predict that the Bank of Canada will intervene, by lowering interest rates, if the dollar closes in on 80 cents. “We have this buoyant export sector that’s creating jobs,” Myers says, “so the last thing you want to see is a higher dollar that undermines that sector of the economy.” Armstrong and other export-dependent manufacturers would surely agree.