Recent Canadian Dollar Weakness Will Support Economy, Lane Says
The Canadian economy's underperformance
relative to the U.S. of late has put downward pressure on the
country's currency, but that should help the economy through a
temporary slowdown, a Bank of Canada official said.
In a speech on how Canada manages its foreign exchange
reserves, Deputy Governor Tim Lane touted the benefits of the
country's floating exchange rate policy that has allowed it to
quickly adjust to shocks and keep reserves at low levels.
Lane made a few observations about the “recent
experience” of the Canadian dollar, which has weakened against
the U.S. dollar because of the relative performance of the two
“To a certain extent, movements in the Canadian dollar
reflect the comparative strengths of the Canadian and U.S.
economies -- which are linked, in turn, to expectations for each
country's monetary policy path,” Lane said, according to
prepared remarks he will deliver Wednesday at the Peterson
Institute for International Economics in Washington.
The U.S. economy has been benefiting from fiscal stimulus,
prompting the Federal Reserve to bring rates higher, Lane said.
In Canada, U.S. trade policies have been holding back business
investment below levels that would be expected given economic
fundamentals. The country is also facing lower oil prices, and
softer housing investment and consumption that has resulted in a
“temporary” slowing of growth.
“This combination of factors has been putting downward
pressure on the Canadian dollar,” Lane said. “The lower
Canadian dollar, in turn, will help support the economy through
Lane's speech went over the history of Canada's reserve
management practices, pointing out the country hasn't intervened
to stabilize the Canadian dollar in over two decades, even
though the option is always there if necessary.
“Canada holds foreign exchange reserves as a precaution
against extreme events,” Lane said. “Even though Canada has
had no history of such events, we know from international
experience that they are possible.
Canada's current level of reserves are about $85 billion,
or about 5 percent of GDP. That's below what most other
countries hold, Lane said.
Lane also said the Bank of Canada monitors closely the rise
since the global financial crisis of Canadian-dollar assets as a
reserve currency, since they could have implications for both
the value of the Canadian dollar and government bond markets.
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