January 15, 2010 / 6:02 PM / in 8 years

Flaherty says weak U.S. dollar pressures Canadian dollar

TORONTO (Reuters) - Lingering concerns about the state of the U.S. economy have put upward pressure on the Canadian dollar, Finance Minister Jim Flaherty said on Friday as the currency hovered near a three-month high.

The strength of the loonie, so called because of the bird engraved on the dollar coin, has slowed down Canada’s economic recovery from a deep slump and policymakers fear a sudden jump to parity with the U.S. dollar could wipe out the economic gains of the past few months altogether.

The United States, where Canada ships about three-quarters of its exports, is largely to blame, Flaherty said.

“The U.S. is running a very substantial deficit. There are concerns still in the U.S. with respect to the housing market, the unemployment numbers are relatively high in the United States, and I know that they remain concerned about ensuring that there is an entrenched recovery,” he told reporters in Toronto after a speech.

“So that places upward pressures on the other market currencies like the Canadian dollar and the Australian dollar,” he said.

Even though the U.S. dollar rose broadly on Friday against other major currencies, its relative weakness is now a fact of life, Flaherty said.

“We always worry about fluctuations in the dollar that are volatile, but I think the reality is that we’re going to be faced with a relatively weak U.S. dollar.”

After touching a three-year high on Thursday of C$1.0225 to the U.S. dollar, or 97.80 U.S. cents, the Canadian currency retreated a bit on Friday. At about 1:30 p.m. (1830 GMT) it traded at C$1.0296 to the U.S. dollar, or 97.13 U.S. cents.

CHINA ON G7 AGENDA

Flaherty suggested the subject of currencies -- particularly China’s exchange rate policy -- would be on the agenda at the Feb 5-6 meeting of the Group of Seven finance ministers and central bank chiefs, to be held in Canada’s Arctic.

China’s policy, widely criticized by Western nations for keeping the yuan artificially weak, has long been the target of G7 policymakers. But the G7 has little leverage to influence China, which sits at the larger G20 table of industrial and emerging powers that is overtaking the G7 as the prime forum for global economic matters.

“My concern with China, of course, is the relative inflexibility of their currency, which is an issue which I know the Japanese minister of finance wants us to discuss when we meet as G7 finance ministers and central bankers in Iqaluit in a few weeks,” Flaherty said.

He also said that U.S. President Barack Obama’s proposal for a levy on banks has little resonance in Canada, where no banks required taxpayer-funded bailouts. Europe’s leading economies have vowed to press on with their own ideas for targeting the financial sector.

“We’re in a rather different position than the United States and the United Kingdom,” Flaherty said.

“We have no intention of taxing the banks or taxing executive compensation in the banks or the life insurance companies, the large financial institutions in Canada.”

He disagreed with forecasts that Canada will have a structural budget deficit in years to come, an assertion made this week by Parliament’s independent budget officer.

“I don’t agree with him that there is a structural deficit. He has made certain assumptions as economists do.”

Flaherty is expected to lay out how he intends to balance the books in a budget to be presented on March 4. He said his plan includes withdrawal of extraordinary stimulus measures, an expected boost in revenues from a recovery in economic growth, and a possible reduction in the rate of spending growth, if necessary.

Additional reporting by John McCrank; writing by Louise Egan; editing by Peter Galloway

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