Woes of a high-flying Loonie
There's little doubt that the relatively high value of the Canadian dollar, particularly in comparison with that of the "greenback," will lead to a lot of "snowbirds" extending their stays in Florida.

The spectacular ascent of the Loonie has led to a lot of speculation as to the causes and whether it will be merely a short-term phenomenon.

Some of the experts think the value will slip back to around 90 U.S. cents, while others see a period when it will be at or above US $1.10, with crude oil peaking well above $100 a barrel.

If there is a consensus, it's that a combination of good fortune, fear and speculation have combined to push the Canabuck beyond its real value.

In this case, the good fortune is primarily in the area of commodity prices, with oil not alone in helping boost our trade surplus with the U.S. Wheat, corn, nickel and gold are examples of other exported products with prices well above historic lows.

Of course, the current phenomenon is not simply a rising value of our currency but a diminished value of the U.S. dollar. For example, a Euro which in January could be purchased for slightly less than US$1.30 now costs about US$1.46.

But nothing we've seen in the dailies or on TV commentaries really explains why it is that the value of our currency has changed so radically in the last decade. After all, it was just five years ago, in 2002, that the Loonie's value reached an all-time low, at barely 62 U.S. cents. And that was in the aftermath of the terrorist attacks of Sept. 11, 2001, and in a period when the political climates in Canada and the U.S. weren't all that different from those now being experienced.

We suspect that historians examining the relative situations in Canada and the U.S. will conclude that in 2002 the Canadian dollar was grossly under-valued, and the spectacular increase witnessed in the following halfdecade was at least in part a result of investors generally, and speculators in particular, awakening to the fact.

Today, there's little doubt that our economy is in better shape than that of the U.S., where the housing market is a shambles and the federal government's debt is now well into the "trillions."

These days, the high-flying Loonie is obviously producing both winners and losers, the winners including our professional sports team owners where salaries have been set in U.S. dollars and consumers who like to shop in the U.S. or on the Internet. The biggest losers are in our manufacturing sector, where job losses are starting to mount.

Curiously, neither the federal government nor the Bank of Canada seems to be concerned at the threats posed by the imploding manufacturing sector and the impact on our lumber industry caused by the collapse of the U.S. housing market.

Bank of Canada governor David Dodge has resisted pleas to cut interest rates as a means of discouraging foreign investment as well as reducing the dollar's value.

As tens of thousands of manufacturing jobs have been lost and as consumer unrest over the continuing price gaps on goods in Canada versus the U.S. started to boil over, he has held interest rates at current levels while they have been declining in the U.S., the bank's main concern being the possibility of renewed inflationary pressures from an over-heated economy in Western Canada.

With the dollar is now up more than 25% against the U.S. currency since January, a Canadian company exporting to the United States finds its prices to U.S. buyers are that much higher. Clearly, those buyers are going to shop elsewhere.

Meanwhile, inflation is currently 2.5%.

Because Canada exports about 30% of everything produced here and imports roughly the same percentage of everything used, the soaring dollar can have a major effect on jobs, profits and growth. Although that is also true for other countries that have seen their currencies appreciate against the U.S. dollar, the impact on them has been far less severe because their trade patterns aren't so U.S.- dominated.

With the U.S. accounting for 80% of our exports, the drop in the U.S. dollar has hit Canada far harder than any other country. For example, the Conference Board of Canada warned last week that profits at hard-hit auto parts makers are expected to tumble this year.

It makes no sense for the Bank of Canada to be fretting over a 2.5% inflation rate when the dollar is doing so much damage to our long-term economic prospects. There would be little doubt that keeping our interest rates below those in the U.S. would have a profound impact on the value of the Canadian dollar - or that our exporters should be able to compete once that value dips to about 90 U.S. cents.