Canada’s dollar reaches 30-year high

Canada’s dollar reaches 30-year high
By Bernard Simon in Toronto
Copyright The Financial Times Limited 2007
Published: May 22 2007 19:31 | Last updated: May 22 2007 19:31



The Canadian dollar climbed to a 30-year high on Tuesday, propelled by strong commodity prices and forecasts that the Bank of Canada might need to hold up interest rates to contain accelerating inflation.

The currency was trading at 92.12 US cents at mid-morning, up from just below 86 cents at the start of the year. It is now almost 50 per cent higher than the all-time low of 62 cents in early 2002.

Stephen Gallagher, economist at Société Générale in New York, said that the combination of strong energy prices, a healthy economy and relatively high interest rates “makes Canadian assets very attractive to global investors”.

Royal Bank of Canada estimates that gross domestic product grew by an annualised 3.5 per cent in the first quarter, well above the Bank of Canada’s 2.5 per cent projection.

However, the performance has been likened to a man with his feet in a fire and his head in a refrigerator: the western provinces are basking in a resources-fuelled boom, centred on heavy investment in oil sands projects in northern Alberta, but growth has stagnated in the industrial heartland of Ontario and Quebec.

Unemployment in Alberta stood at 3.4 per cent last month, compared with 6.6 per cent in Ontario and 7.2 per cent in Quebec.

Manufacturers in Ontario, which makes up about 40 per cent of national output, have been hit by the rising currency and by sluggish demand in the US, especially for motor vehicles. The three Detroit-based carmakers, General Motors, Ford Motor and Chrysler, are cutting production and staff in Canada as well as the US.

Still, rising inflation has led many economists to reverse earlier projections of a cut in interest rates.

The consumer price index rose by 2.2 per cent in the year to April. Excluding energy, the gain was 2.4 per cent, the highest in almost four years.

The bank expressed concern at its last monetary policy review in April that rising fuel and food prices, as well as capacity constraints, had unleashed unexpected inflationary pressures. Businesses in Alberta and British Columbia have reported acute labour shortages, leading to steep wage increases.

The central bank is expected to leave its trend-setting overnight lending rate at 4.25 per cent at its next monetary policy review on May 29. The rate was last changed a year ago.

Royal Bank said on Tuesday that “the case for a rate increase later this year is building”.According to Mr Gallagher, the surging currency might dampen inflationary pressures and thus discourage a rate increase.