Summary
The world of economics seems nervous with thoughts concerning the impact of the rising dollar on next year's economy, yet the consensus opinion looks for logical economic growth of 3 per cent in 2004. On the other hand, everyone has noted the dramatic and time compressed rise in our currency over the past year. Acknowledged that interest rates, both short - and long-term, have stayed relatively flat over that time, there has been a one-for-one tightening of monetary conditions from the dollar's rise.
Most economists say that monetary policy drives fluctuations in the business cycle. Therefore, seeing the currency hurdle from 62 cents (U.S.) to 76 cents is similar to throwing the economy into a pool with a live wire feed. The benefits of free trade with the Americans are a rise in our job opportunities and living standard; the cost of this is a bizarre reliance on external markets.
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United StatesIn fact, 50 cents in every dollar generated in our economy relies on trade with the United States. The rise in the currency could be celebrated as an earned rise in purchasing power, equivalent to a 20 per cent pay hike.
It cannot be that Canada's "underlying fundamentals" are behind the rise. Our productivity growth is relatively poor; the economy is slow moving right now, most provinces are in or close to deficit positions, and the federal government has almost spent itself into the red. Of course, inflation is low, but that has been true since 1990, when the currency was priced over 90 cents. The most important reason for the currency rise is our interest rate structure.
What happens when the U.S. dollar depreciation slows? When the economy is strong enough for the central back to raise interest rates (mid 2004?), when the rise in our currency starts...