Bank of Canada says not afraid to act on strong loonie

Tue Apr 27, 2010 6:18pm EDT
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By Louise Egan

OTTAWA (Reuters) - Bank of Canada Governor Mark Carney said on Tuesday he would not hesitate to take steps to slow the Canadian dollar's rise if it became clear that market speculators were pushing it to unrealistic levels.

He said the strength of the currency, which this month reached parity with the U.S. dollar, reflects several factors including a strong economy, strong fiscal position and rising commodity prices.

Even so, he said currency strength is one of the main challenges to the Canadian economic recovery.

"I would say that persistent strength in the Canadian dollar is a risk," Carney said in testimony before the House of Commons finance committee.

"We've only identified two major downside risks to the Canadian outlook and the dollar is the first. So it's something we watch closely and it could have an important influence on both economic activity and the outlook for inflation. The bank will set policy appropriately in those circumstances," he told legislators.

"Markets sometimes overshoot and we should be conscious of that. For those reasons, the bank, in agreement with the minister of finance, have additional tools to address those situations. And no one should be under any illusions that we wouldn't use them," he added.

The Canadian dollar dropped more than a 1-1/2 cents against the greenback on Tuesday on fears about sovereign debt levels in Europe after Standard & Poor's slashed Greece's debt rating to junk status, which spurred a flight to safety.

But it has added to gains after a 15.9 percent rally last year and this month traded at its strongest since June, 2008.   Continued...

<p>Bank of Canada Governor Mark Carney prepares to speak at a House of Commons committee meeting on Parliament Hill in Ottawa April 27, 2010. REUTERS/Blair Gable</p>