BASEL, Switzerland (Reuters) - Bank of Canada Governor David Dodge said on Monday a slowdown of the U.S. economy in the first half of 2008 could have a worse impact on Canada’s performance than was expected just a few months ago.
“The downside risks to Canada from slower U.S. growth in the first half of 2008 are probably greater than we estimated in October,” he told reporters on the sidelines of a meeting of the Bank for International Settlements in Basel, Switzerland.
The United States is Canada’s largest trading partner, and worries over the state of the world’ biggest economy were reinforced last week by weaker-than-expected jobs data.
The U.S. economy added just 18,000 jobs in December and the unemployment rate rose to 5.0 percent, its highest level in more than two years, up from 4.7 percent in November.
A further headwind for the Canadian economy has been the strength of its dollar against the U.S.‘s, after the Canadian dollar hit a 130-year high of U.S. $1.1042 on November 7, equivalent to one U.S. dollar being worth 0.9056 Canadian dollars.
The Canadian dollar has since eased to U.S. $0.9941, but Dodge, in separate remarks to news agency Market News, suggested it might have further to fall.
“Our analysis would indicate, based on historic norms...(that) a Canadian dollar in U.S. dollar terms somewhere in the low to mid 90s is totally justified in terms of the historical relationships between terms of trade, domestic economic performance and so on,” Dodge said.
Nonetheless, he cautioned against drawing any immediate conclusions, saying that “the appropriate level for the (Canadian) dollar is always exactly where it is.”
Earlier he had told reporters that Canadian currency’s strength was “clearly having a slightly greater downside impact on our domestic inflation than we expected last October.”
Speaking on central banks’ recent liquidity actions, Dodge said that the coordinated effort had been viewed positively by commercial banks attending the BIS meeting.
“It was clearly helpful over year-end,” Dodge said. “The clear message was that what we did in terms of concerted action over year-end was helpful.”
Along with other central banks that made similar moves, the Bank of Canada announced in December it would inject more money into short-term credit markets, which were under strain from year-end demand for cash.
It carried out the market operations as part of a coordinated move by the U.S. Federal Reserve, the European Central Bank, the Bank of England and Swiss National Bank.
Reporting by Krista Hughes, writing by Karolina Slowikowska