Dealing with a loonie at par: Four options for business and government

OTTAWA, April 8 /CNW Telbec/ - Canadian businesses have four options to respond to a loonie at or near parity with the U.S. dollar, but only two - boosting productivity growth and expanding the internationalization of their firms - have the potential to provide significant long-term rewards, according to a new Conference Board briefing for its International Trade and Investment Centre.

"Canada's solid banking system, solid domestic economy, relatively healthy fiscal situation, and wealth in raw materials will continue to support a loonie at par with the U.S. dollar," said Glen Hodgson, Senior Vice-President and Chief Economist.

"For firms that are willing and able to adapt, a strong dollar may be just the challenge that unlocks new economic potential through enhanced innovation, faster productivity growth and expanded internationalization."

The publication, Learning to Live With a Strong Canadian Dollar: Four Options for Business and Governments, identifies four approaches:

Do nothing - This option is both easy and extremely painful. The conditions for what is called "Dutch disease" - the loss of international competitiveness due to a stronger currency that is pushed upward by higher prices for key commodity exports-are already occurring in Canada. If firms do nothing, they increase the risk of a serious case of Dutch disease.

Adopt a fixed exchange rate by pegging the loonie to the U.S. dollar - Advocates of this position emphasize the potential benefits of exchange rate stability. However, Canada would essentially be eliminating the Bank of Canada's latitude to establish an independent monetary policy. Pegging the loonie to the greenback could also lead to the erosion of Canada's political sovereignty. The bottom line is that Canada has chosen to allow the exchange rate to float and act as a shock absorber to adjust to global forces. A floating exchange rate policy has served Canada well for decades and remains the best policy course.

Boost Productivity Growth - Action on a number of fronts is needed to improve the productivity performance of firms and the overall economy: fostering stronger investment in physical capital; increasing investment in people; reducing regulatory barriers across the economy; and reenergizing free trade and investment within North America and globally.

Expand the internationalization of Canadian business - Closely interlinked with increasing productivity, this fourth option would see more Canadian firms use multiple approaches to participate in the global economy. The findings of the Conference Board's recent study, Dollar Volatility: Who Should Care? found that firms and industries that have more ways of hedging their operations - such as manufacturing, contrary to the conventional view - are better positioned to reduce the financial risks associated with changes in the value of the loonie.

The publication is produced for The Conference Board of Canada's International Trade and Investment Centre. The centre is intended to help Canadian leaders better understand what global economic dynamics -such as global and regional supply chains, domestic barriers to trade, US policies, or tighter border security-could mean for public policies and business strategies.

For further information: Brent Dowdall, Media Relations, Tel.: [phone] ext. 448, E-mail: [email protected]