Heather Scoffield took questions on the dollar
Globe and Mail Update

The Canadian dollar sprinted past 90 cents for the first time in nearly 30 years Tuesday, leading economists to speculate on when the loonie might match the U.S. dollar, sparking cautionary comments from one provincial premier and providing ample discussion fodder for Globe readers.

Will inflation become and issue? Will the Bank of Canada send interest rates higher? Can Canadian manufacturers, which have shed almost 200,000 jobs since the end of 2002, tolerate the upswing? Make sense of it all with Heather Scoffield, The Globe and Mail's economy reporter, who was on-line earlier Wednesday to discuss the surge and what it means for Canada.

Questions and responses appear below.

Heather Scoffield covered fiscal and monetary policy for The Globe and Mail's Ottawa Bureau before becoming the newspaper's economics reporter in Toronto last year. She has written extensively about how public policy affects business and the economy.

Editor's Note: globeandmail.com editors will read and allow or reject each question/comment. Comments/questions may be edited for length or clarity. HTML is not allowed. We will not publish questions/comments that include personal attacks on participants in these discussions, that make false or unsubstantiated allegations, that purport to quote people or reports where the purported quote or fact cannot be easily verified, or questions/comments that include vulgar language or libellous statements. Preference will be given to readers who submit questions/comments using their full name and home town, rather than a pseudonym.

Sorry for the delay getting started — we had some technical problems just as the discussion was beginning.

Michael Snider, globeandmail.com: Hello Heather, thanks for being with us today. I know you've got a loaded to-do list, so let's wade right in. It's taken four years, but the dollar has risen from about 64 US cents to more than 90, but recently, as in this spring, it seems the buck has picked up speed — like increased 4 1/2 per cent in April. What's behind the spring surge?

Heather Scoffield: Hi Mike. Thanks for having me. Things are developing so quickly for the Canadian dollar that I'm probably going to have to change all my answers before this chat is over...

The "spring surge", as you call it, is linked to a confluence of factors, and they're all feeding on each other. Rising oil and gas prices, of course, are pulling the Loonie up all the time. But there's more to it than that. We've seen the Loonie rise when oil and gas are flat. So part of the strength has to do with the state of the Canadian economy itself. Our economy is running flat-out, at least by the Bank of Canada's measurements. So more rate hikes may be on the horizon, at a time when it looks like the U.S. Federal Reserve is about to put rate hikes on hold. So the prospect of the two central banks heading in opposite directions makes the Canadian dollar even more attractive than it already was.

Plus, the U.S. dollar has taken a beating lately, and that makes the Canadian dollar stronger too. But part of the Canadian dollar story is just pure speculation, especially in the past few days. There is a bit of a bandwagon effect going on, with traders piling into Canada just because they see momentum there.

Hugh Clarke from Montreal writes: When the dollar falls, economists tell us that this is bad for the Canadian economy, because imports will cost more. When the dollar rises, economists tell us that this is bad for the Canadian economy, because our exports will cost more. Could I ask the economists to help the rest of us understand, by taking a consistent position?

Heather Scoffield: I don't think you'll find many economists who would uncategorically say a low or high dollar is bad for the Canadian economy. I think economists are alarmed at the speed of the appreciation. A high loonie makes our exports more expensive, but even companies that depend on exports for their profits can hope to benefit from a rising dollar by importing relatively cheaper machinery and parts for their production. And in this case, Canada's terms of trade have improved immensely, along with the rising dollar, because the world can't get enough of Canada's oil and gas. So that makes us all feel richer. The trouble comes for companies having to change their business decisions based on the rapidly changing exchange rate. If an exporting company, especially a manufacturer, can't cut costs through cheaper imports fast enough to keep up with the higher dollar, then profits will take a hit.

Mary Smith from Toronto writes: Is our dollar really appreciating because our exports are increasing or is it because the U.S. dollar is depreciating?

Heather Scoffield: The Canadian dollar is appreciating partly because of our oil and gas exports. But the rest of our export sector is not faring nearly as well, since Canadian goods are now much more expensive to the rest of the world than they were just a couple of years ago. And the U.S. dollar depreciation is also a major reason for the Canadian dollar's appreciation. The U.S. dollar has probably been due for a correction for a long time. But it's difficult to point to a single factor for the Canadian dollar's rise.

Robert Palmer from Montreal writes: I guess maybe I may have not listened fully to my macro-economics courses, but is not the rise in our dollar suppose to make imports cheaper. I guess my question is why does the same Porsche Boxster (or any car for that fact) costs over 30 per cent more in Canada than the U.S. (even though our dollar has risen over 30%). This is the same even for those cars made in Canada. Are car companies just trying to make more money of us or are afraid of lowering the price of new cars to the point that it decreases the value of cars already on the market?

Heather Scoffield: I'm a bit out of my comfort zone when it comes to the auto industry, so I asked my colleague Greg Keenan, the auto industry reporter, to take that question. He says: One reason may be that for years, prices in Canada were lower than they should have been given the exchange rate. So they may be trying to catch up from that period. I'm pretty sure that most cars don't carry a 30 per cent premium.

Sean Miller from Kamloops writes: The neo-classical economic perspective assumes that a change in the real exchange rate is a result of a change in savings and investment. This shift may be caused by an increase in investment or a decrease in saving. Because savings minus investment equals net exports the exchange rate is then directly related to trade. Given that the high Loonie will cause Canadian goods to be expensive on the international market further resulting in a trade deficit, will the benefits of having a strong currency out weigh the trade imbalance later on?

Heather Scoffield: I think you have to look past the economic theory to oil and gas. Yes, the high Loonie makes Canadian goods more expensive on the international market, but no one seems to care about that when it comes to oil and gas. People buy it anyway, and don't seem to want to cut back no matter how high the price goes. So we're not even flirting with a trade deficit. But we do have to wonder whether the strong dollar will do more harm than good in the long run. At some point, manufacturers, which are already laying off workers in droves, will feel the heat and start to go belly up. For now, at a macro-economic level, they are holding their own, but we don't know how long that can last.

Gabriel Vitus from Port Moody, BC writes: If the strengthening of the loonie against the dollar is dampening the 'exporter' market, why does Canada not increase exports to Europe? The euro/loonie exchange is still good for the 'exporters'. I think the biggest problem here is the quasi dominance of trade with the US. We were told in business school 'don't put all your eggs in the same basket' yet Canada is storing most of its eggs in a basket called US. We are loosing good opportunities to expand trade with the rest of the world. And, Marc D from Canada writes: The recent 'surge' is only compared to the U.S. dollar, which is itself dropping against other currencies. The Canadian dollar is actually dropping against other currencies. When is Canada going to learn to look beyond our southern neighbour?

Heather Scoffield: I'll take these questions together, since they are similar. The Canadian dollar has actually appreciated against other currencies too, over the past few months. That can change day to day, but when it comes to pricing exports, it's better to look at the long-term trend.

But you do put your finger on something that has confounded policy makers and Corporate Canada for decades: a dependence on the U.S. market. There have been many attempts by politicians to encourage Canadian companies to turn to the rest of the world and diversify, for their own sake as well as the country's. But in the end, the U.S. market is the biggest and richest in the world, it's right next door, and Canadian companies understand better than anyone how that market works and what it needs. We're addicted.

Sue K. Bradsteen from Bradenton, FL writes: Its very easy to stop the Canadian dollar from rising relative to the U.S. dollar. If Canada runs a Federal budget deficit, provincial budget deficits, a trade deficit, gives away its abundant natural recourses, starts a war in violation of the UN charter, fails to pass taxes to cover that war, then your Canadian dollar rise will fall. Also, it will aid in stopping that rise to get an unlimited amount of corporate control of the Canadian government. Corporations are imminently successful in draining government treasuries. Lastly, get rid of your national health program and go to HMO's. If all of this fails have your government operate in secrecy and pass a Homeland Security Act that allows the government to enter any home without a warrant. When your national debt reaches one entire year of your GDP if you haven't stopped the rise of your currency then you should consider abolishing all taxes on the very wealthiest and corporations. P.S. Hopefully one day our countries will again enjoy the commaradery we once knew.

Heather Scoffield: Thanks for reminding us that a high Canadian dollar is partly the result of doing some things right in our country. It was pretty depressing when we were at 62, despite having eliminated the deficit, getting inflation down, cutting taxes and so forth.

Al Forone from Toronto writes: It appears to me there are two issues re the surging C$: the obvious is the direct relationship to the U$, which is something like the sparrow that flits around but never wants to get too far from the rhinoceros, but the larger question is whether the U$ is going to fall relative to the other major currency rhinos when its interest rates level off, seriously affecting the trade and debt saw-off that has been keeping the US economy going strong. On this, I was surprised that Mr. Dodge, who has been campaigning for action on the global issue, sounds so hawkish about raising Canadian interest rates and lifting the C$ above and beyond the effects of the commodity spike. What is the Bank of Canada contingency for a serious weakening of the U$.

Heather Scoffield: You have obviously been studying the most recent edition of the central bank's Monetary Policy Report. Yes, Mr. Dodge did seem to have a shift in his thinking about the prospects of a disorderly resolution of the U.S. current account deficit. Until last week, Mr. Dodge was quite alarmist about the possibility that 2007 could bring big trouble for the Canadian economy if the world were to suddenly lose confidence in the ability of the United States to bankroll its massive deficits. But he has backed away from that fear, and says he is less pessimistic than before, mainly because the other major economies of the world — Asia and Europe — seem to be picking up some speed.

The central bank believes that even if the U.S. dollar continues to weaken significantly, the Canadian dollar has already finished most of its adjustment and would only move a few more cents as a result. That belief looks a bit questionable given the rise in the Canadian dollar in the past few days. Mr. Dodge will answer questions this afternoon from the Senate in Ottawa, and I'm sure he'll have something to say about this.

Editor's note: you can tune into Mr. Dodge's Senate meeting via the Internet. The meeting will be Webcast at 4 p.m. EDT.

Andrew Addison from Taiwan writes: Hi, I'm currently living and working in Taiwan. I have been here for a couple of years and have managed to save a decent amount of cash over that time. In Taiwanese currency I have maintained a consistent salary; however with the strengthening Canadian dollar my wage, after conversion, has dropped significantly. I plan to permanently return to Canada in mid august and will bring my saving with me. Do you foresee any potential for the dollar to drop to the .85US range we saw a month or so ago? Thanks for your time.

Heather Scoffield: I suggest you ask for a raise! As for the future of the Canadian dollar, there seems to be a rush among forecasters to call for an ever-stronger loonie, but I'm not going to get caught on that bandwagon. Markets are fluctuating rapidly these days, and I think we'd be better off to wait for a few days, at least, to see how our currency develops, and then see what the forecasters say. And keep your eye on the U.S. economy. If it falters, as many say it will, then Canada will pay a price, and it could trickle down to the exchange rate. So while currency traders don't see a huge downside to the loonie right now, that could change quickly.

Sonny L from Toronto writes: Why isn't the rising Canadian dollar having the calming effect on interest rates it's supposed to have? Some say inflationary pressures are greater than the BoC and Fed are letting on. Finally, is the new Harper budget going to feed inflationary pressures?

Heather Scoffield: I think the rising Canadian dollar has actually had a huge effect on inflationary pressure. The central bank thinks the Canadian economy is operating at full capacity and has been for some time. Normally, this is a sure recipe for a rising inflation rate. But the core inflation rate has been well below the bank's target of 2 per cent for more than two years now. Part of that is because the strong Canadian dollar has made imports really cheap, keeping the overall level of prices down despite the strength of our economy. As for the budget, there is a debate right now about whether it is unduly stimulative, but the upshot of the debate is that yes, it is simulative, but not to the point where the Bank of Canada is going to get really worried.

Jill Paylor from Gravenhurst writes: Are all signs are leading to a recession in today's economy?

Heather Scoffield: No. Some signs point to trouble in some sectors. Manufacturing is struggling, although output is still increasing -- contrary to what has happened in past recessions. The forestry industry has had a tough time, partly because of the exchange rate. But unemployment is at a 30-year low, corporate profits are flying high, and growth is steady and strong. Those trends won't change in a big hurry.

Robert Palmer from Montreal writes: In terms of large-ticket consumer items (i.e. cars, appliances, etc.), should we not see a decrease in the costs of these goods from last year?

Heather Scoffield: Yes, especially if those items are imported, or contain lots of imported parts. We've seen major decreases in the prices of electronics and computerized products, partly because of the currency and partly because global competition is keeping those prices low.

Jerry King from Toronto writes: Hi Heather, are you aware of any sectors of the Canadian manufacturing landscape that are experiencing, or have the potential to experience, productivity increases of a magnitude that can withstand the appreciation in the Canadian dollar?

Heather Scoffield: The manufacturing sector has actually made astounding progress on the productivity front, and it's probably a large part of the reason why there's not more carnage in that sector. Statscan just revised its productivity numbers for last year, and we don't yet have a breakdown for manufacturing, but it looks like productivity gains were well over five per cent for the sector. That's really high. But the effects of a high dollar are notoriously slow to kick in, so it looks like manufacturers have, overall, adapted to earlier rises in the loonie. I'm not sure how well they will fare adapting to the most recent wave. There are no doubt massive layoffs still in the works. Manufacturing output has been on the increase, but I don't know if that will continue once the effects of the 90-cent loonie begin to be felt.

Elias Peter from Toronto writes: We have seen the housing prices tumbling in some US Markets. Will the rise in dollar affect house prices in Ontario, since the Ontario economy depend on the manufacturing sector?

Heather Scoffield: Housing prices in Canada have surprised most forecasters lately. There were many predictions late last year for a cooling off in the market this year, but so far, it has not materialized. The Ontario economy, however, is indeed facing some major challenges because of the high dollar. Rates have risen and may continue to rise, while the Ontario economy is bumbling along at a sub-par rate. So housing could react to that. But it's not that straightforward, because the Ontario unemployment rate is really low, wages are rising, and corporate profits are booming. So that could feed into higher housing prices.

Gerry Harrington from Ottawa writes: I'm not sure I understand why inflation is such a concern with respect to the rising Loonie. It seems to me that a rising Loonie tempers export growth and reduces import costs, both deflationary pressures. Increasing nominal interest rates to guard against inflation would also only drive the Loonie higher, taking even more steam out of inflationary pressures. Am I missing something?

Heather Scoffield: No, I don't think you're missing anything. That's why the Bank of Canada is in a delicate position right now. Does the bank continue to raise rates to fight off potential inflationary pressure, and risk overdoing it because higher rates will drive the loonie higher? The central bank's commentary lately seems conflicted, and probably reflects a huge internal debate they're having on this topic. We'll see what David Dodge has to say about it all this afternoon.

Michael Snider, globeandmail.com: Heather, thanks very much for being with us today. Readers, we're sorry if we didn't get to your questions/comments. Please feel free to add your two cents by clicking on the "comment" link below.

If you have any thoughts about the Discussion format or would like to see a particular reporter/columnist invited on or a particular subject covered, let us know. You can email your thoughts to

Heather Scoffield: Thanks for all your insightful questions. It's great to see some women engage in some public debate on economics. It's a fascinating time to be watching the currency markets, the inflation rate, the unemployment rate and housing prices. They all seem full of surprises, making business decisions and monetary policy quite tricky. So far, Canada is faring well, but stay tuned to see if that can last.

High dollar not justified: Dodge
HEATHER SCOFFIELD

Globe and Mail Update

Bank of Canada Governor David Dodge is suggesting that the recent moves in the currency are not justified by market forces.

In an appearance before the Senate Wednesday afternoon, he said appreciation of the Canadian dollar until early this year was justified by market forces. But he carefully avoided comment on the recent surge.

"Certainly up until early this year, by and large, much of the adjustment of the Canadian dollar ... was the result of these market forces," he told the Senate.

The central bank has said it sees no need to react with interest-rate adjustments if the Canadian dollar is merely responding to market forces. But if the moves in the loonie are not related to economic fundamentals, the bank would be inclined to do something about it.

Mr. Dodge stressed that the bank will reconsider its interest rate policy on May 24, and "may" raise rates further. The bank has raised rates six times since September.

Senior deputy governor Paul Jenkins told the Senate committee that the bank is struggling to deal with competing influences on inflation, but the economy "is beginning to show some pressure points."

Mr. Dodge indicated he was not concerned about the high price of oil, saying it's justified by booming demand and capacity restrains.

"We don't think there is something fundamentally screwy about the pricing against that futures curve," he said