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Get used to it!: The Canadian dollar is going to keep on rising
Michael Hlinka
We’ve seen the Canadian dollar on a pretty strong run lately, at least compared to the US currency. The numbers tell the story. The
annual average exchange rate for 2002 was $1.57. It rose to $1.40 in 2003. Next year’s was $1.30, and in 2005 we saw $1.21.
Just when many people thought the Canadian dollar couldn’t do much better… it did, hitting $1.13 in 2006. Now on an almost daily basis,
the loonie hits multi-year highs.
The consensus is sooner or later (some believe sooner), our Canadian dollar will actually be trading at a premium to the US greenback. I agree. It should happen sometime in 2008 or 2009. And then I think our dollar will stay there for the next 50 years.
Some people tell me this is quite a bold prediction. It is and it isn’t. Currencies tend to act a lot like glaciers in that it takes quite a bit of force to move them, but once started, they’re pretty
hard to stop.
In this particular case, the force moving the exchange rate isn’t so much what Canada is doing right as what the US is doing wrong. The country is in hock up to its ears.
According to a recent article in the Financial Analysts Journal, the present value of US federal government obligations is $64 trillion.
(By the way, that’s a six and a four, and then twelve zeroes.)
In fact, it’s such a big number, it’s meaningless. Here’s some context for you. If the US government confiscated all the land and
property in the US, as well as the improvements—the buildings, machines, equipment— and then took all the money in bank accounts
and investment portfolios and sold them to foreigners without depressing the value of those assets, it would still be $20 trillion short. (That’s a two and then thirteen zeroes.)
In other words, there’s no way the Americans will honour their obligations with “real” dollars. They’ll pay off their debts by printing more money, inflating their way out of bankruptcy.
Some people are predicting economic disaster stemming from the US trade debt. Perhaps. It’s hard to know for certain, but this is what I do know. The economy today with a $1.05 exchange rate is infinitely
better than it was in 2002 when it took $1.57 Canadian to buy one dollar American.
Currencies appreciate because relatively speaking, one country is economically outperforming the other. And as long as we keep doing better than the Americans, our dollar will continue to climb higher
and higher.
That’s a pretty nice problem to have to deal with! b2b
Toronto-based Michael Hlinka provides daily business commentary to CBC Radio One and a column syndicated across the CBC network. He also conducts financial planning courses.
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