Bank of Canada repeats warning on strong currency

Tue Aug 25, 2009 3:47pm EDT
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By Louise Egan

KINGSTON, Ontario (Reuters) - The Bank of Canada issued another warning on Tuesday about the strong Canadian dollar threatening the country's economic recovery, which it sees occurring in the third quarter.

"Other things being equal, a persistently strong Canadian dollar would reduce real growth and delay the return of inflation to target," Deputy Governor Timothy Lane told economists in his debut speech as central banker.

"If a stronger dollar were to alter the path of projected inflation relative to that presented in our July Monetary Policy Report, we would need to take that into account," he said.

Lane said the Bank of Canada has the tools at its disposal to handle the appreciating currency. But with interest rates at a historic low of 0.25 percent, the options are limited and most economists think the bank will confine itself to verbal intervention to get speculators to back off the currency.

"They could intervene in foreign exchange markets but quite frankly I don't think that's the signal we're getting at the moment. I don't think we're getting a message here to get ready for intervention," said Craig Alexander, deputy chief economist at TD bank.

The Canadian unit, which had pared early gains against the U.S. currency as oil prices fell, weakened further after Lane's remarks were published. The currency, which has rallied about 20 percent from a four-year low in March, hit a session low of C$1.0870, or 91.99 U.S. cents, after the speech.

Lane said some of the currency's rise had stemmed from factors like higher commodity prices that are leading to a Canadian recovery. Traditionally, the bank has said it would not counter foreign exchange movements based on such factors.

However, he also said it was a result of a more generalized weakening of the U.S. dollar as global financial conditions normalize.   Continued...

<p>A Canadian one dollar coin, also know as a loonie, is shown in Montreal, April 28, 2006. REUTERS/Shaun Best</p>