December 8, 2007 / 2:15 AM / in 10 years

Bank of Canada says currency back in comfort zone

OTTAWA (Reuters) - The Canadian dollar’s decline in the past month has brought it to a level the Bank of Canada is comfortable with after the “awful experience” of the currency hitting a modern-day high in November, bank Governor David Dodge said on Thursday.

<p>Bank of Canada Governor David Dodge listens to a question during a news conference in Ottawa October 18, 2007. REUTERS/Chris Wattie</p>

In unusually explicit comments on foreign exchange rates, Dodge said the central bank feels at ease with a Canadian dollar that is worth less than the U.S. dollar, mentioning the mid-90 U.S. cent level as one that reflects the state of the Canadian economy.

The currency has appreciated since 2002, rising past parity with the U.S. dollar in September, and then hitting a peak of US$1.10 on November 7 before backtracking.

At 1 p.m. (1800 GMT) on Thursday, the Canadian dollar was at 99.15 U.S. cents, valuing a U.S. dollar at C$1.0085.

“If we leave aside the issue of this spike that took us from a buck to a buck ten and back to a buck in the course of several weeks ... The move from -- let’s say the mid-60s cents value to the mid-90s cents value -- more or less accords to what was going on from a domestic perspective,” Dodge told a Senate banking committee.

“Leaving aside this awful experience we had with the spike’s not clear that there was something we should have done,” he said.

In its projections in October, the bank assumed the Canadian dollar would trade, on average, at the equivalent of 98 U.S. cents.

It said that if the currency traded persistently above that level for reasons not related to economic factors, it would pose a risk to growth.

He did not rule out further spikes in the currency if market turbulence continues, but suggested they would not necessarily affect monetary policy.

“You have to separate quite clearly the kind of trend movements that you can see make sense against what’s going on in commodity prices, productivity and so on here in Canada and those movements that represent turbulence in markets which have largely since ended and been corrected,” he said.

“We can expect further turbulence, that doesn’t make life easier for anybody, in particular for exporters it doesn’t make life easy, but you’ve got to look through that at the underlying factors that are there.”

The Canadian dollar has fallen about 11 percent from its high in early November due to a drop in oil prices from record levels, a sudden wave of softer domestic economic data and a Bank of Canada interest rate cut this week.

Dodge’s testimony was his final appearance before a parliamentary committee before he steps down on February 1, when his successor Mark Carney takes over.

Dodge revealed no bias for his last interest rate decision, which will be made on January 22, saying only it would depend on the economic data between now and then. The bank cut rates by a quarter-point on Tuesday to 4.25 percent, saying it expected U.S. subprime woes and financial market troubles to last longer than previously expected.

Answering questions on the U.S. trade deficit and credit market troubles, Dodge said the depreciation of the U.S. dollar was one step toward bridging the gap between the huge U.S. trade deficit and China’s current account surplus.

He also called the repricing of risk in markets a “pretty good thing.”

“However, that being said, the process of that widening out is messy. You’re never quite sure exactly how it’s going to operate,” he said.

He said it was difficult to determine the magnitude of underlying credit market losses and that uncertainty will remain in the asset-backed commercial paper market as long as there is no transparency in those instruments.

Additional reporting by Frank Pingue, Randall Palmer, David Ljunggren, John McCrank; Editing by Peter Galloway

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