Should the Loonie be downgraded?

[Alpine Trooper]

For those of you who don't know, a Canadian dollar is referred to as a "Loonie". Earlier this week, it breached the 90 cent mark against the American dollar, also known as the "Greenback".

A similiar situation occured in the 70s, however the Loonie eclipsed the Greenback then and was worth near or above one dollar, can't be precise. To save industry that has a large American market, the government of Canada reduced the Loonie's value on the world market below the Greenback to draw more foreign investment.

The same situation is set to happen again. Canada's economy is booming and doing extremely successful.

Should the government do the same again and reduce the Loonie's value to encourage American investment or because the Greenback is no longer the world standard, let the Loonie to continue its rise and eclipse the American dollar, in favour of other foreign investment and guage it against a different currency?

The Canadian dollar soared over the 90-cent US mark in international trading on Tuesday, its highest level in nearly three decades.

* INDEPTH: What's behind the soaring Canadian dollar?

The loonie breached the 90-cent barrier for the first time since May 1978, trading as high as 90.37 cents US before slipping back to 90.11 cents US.

On Monday, the currency closed at 89.83-cents US on the eve of the the federal government's budget. The dollar had just missed the 90-cent mark, reaching a high point of 89.98 cents during the day's trading.

Rising commodity prices are helping to keep the Canadian dollar at a 28-year high against its U.S. counterpart.

The currency is being bolstered by rising demand for Canadian commodities, including oil, gold and nickel.

Oil held steady below $74 US a barrel on Monday, keeping within sight of record highs.

The Canadian dollar has been creeping upward for four consecutive years and has increased about 4.2 per cent against the U.S. dollar so far this year.

http://www.cbc.ca/story/business/national/2006/05/02/canadian-dollar060502.html

 

[Mulholland]

Nope. Let it stay where it is. This a perfect opportunity for our manufaturers to get thier hands on some cheap US capital equiptment and increase thier efficiency. Also, manipulating a currency's value can be a very tricky thing to do. I'd prefer if the Bank of Canada just stuck to it's 2-3% inflation target as a steadily appreciating currency is much better than a wildy fluctating one.

 

[punkbass2000]

I'm gonna wait for JerichoHill's response.

 

[jamiethearcher]

I dont mind a high dollar - that way when I move back to Canada, it will be easier to repay my USD student loans!

 

[Desmond Hawkins]

You mean artificially downgraded? That sounds foolhardy.

 

[sysyphus]

What we should do is diverisfy our trade, as the Loonie has remained level with other major world currencies.

Enough countries have mucked about with their currency and paid a nasty price for it, I think wisdom would dictate to us that we should avoid it.

 

[JerichoHill]

I'm gonna wait for JerichoHill's response.

Why would one want to mess with the foreign exchange market?

Here's the response I would give. I'm not familiar with the looney though.

Is there an artificial reason why the Looney is rising? If it is rising through the natural outcomes of the market, then there is little reason to change its value, doing so will only hurt Canada in the long-run.

However, if there is some artificial reason, i.e. not related to market pressures, then some adjustment would be in order to bring it back in line to the market, regardless if that means going up or down.

In the long-run, and in an exchange market without barriers, fluctations in currency value are economically neutral. Value changes guide the flow of imports and exports.

An increase in the purchasing power of the Looney against the Dollar will, ceteris paribus, increase imports of US goods into Canada. Canadian Firms will have to purchase dollars to make these transactions, and that in turn will raise the purchasing power of the dollar relative to the Looney.

The 1970s was very different, so while its useful to look at history, what happened in the 70s was such an abbreration form normal market forces that I would be skeptical of drawing inferences.

Does that make sense?

 

[sysyphus]

Soem valuable insight Jericho, thanks.

It is a antural increase, and as I pointed out, it's onyl an increase against the US dollar, wourldwide it is stable.

 

[CartesianFart]

The 1970s was very different, so while its useful to look at history, what happened in the 70s was such an abbreration form normal market forces that I would be skeptical of drawing inferences.

Does that make sense?

I guess in overall in your view is that of something that a scientist would look at a certain similar way in all cases of the phenomenal world .That scientist and the economicist observe and measure a certain phenomenon under certain condidtion and finally produce a theory,even if it is an artificial one.

The economicist that uses the science of induction will never be certain and will always be burden with the empirical base evidences.

Sorry,i guess i went off the wrong track,but i can't help that the many impressions that i recieved by an economicist in many conversation that i have had with them is that they can never give any certainty but only probability.

 

[Desmond Hawkins]

Yes, it is indeed natural.

Canada has been running a very strong trade surplus with the United States for many years now. This is largely due to the fact that Canada is a major commodity exporter. Oil, timber, metals have been very strong.

 

[JerichoHill]

The problem in economics is that you can't have lab-quality controls like you can in physics. Our laboratory is the world.

This is partially being addressed with agent-modeling and simulation.

When an economist speaks about theory, we talk about generally what will happen.

It's like this. You're in a poker game, there's been a raise and a call in front of you, you look down and see pocket Aces. You raise hefty, and call a re-raise by going all-in against one opponent. You flip over your cards, and he has pocket Kings.

80% of the time, you'll win. 20% of the time, you'll lose. But theory will tell you to do it everytime.

EDIT: In the 1970s we had an oil shock, wage and price controls, and other generally bad things (Nixon anyone) that really changed the way the economy operated in that timespan

 

[El_Machinae]

It will even out. If commodities return to lower levels, the dollar will lower in value anyway.

Deflating the dollar hurts the savers. And we're hurt enough already.

 

[warpus]

Artificially devaluating the loonie won't please the Americans at all - we'll likely see sanctions, etc.

 

[Xanikk999]

Artificially devaluating the loonie won't please the Americans at all - we'll likely see sanctions, etc.

Sanctions against our best friends?

 

[jamiethearcher]

Sanctions against our best friends?

What does Great Britain have to do with this discussion? (j/k)

 

[blackheart]

Let nature run its course, leave out the interference.

 

[Red Stranger]

So the Canadians want to try to pull a communist China on us?

 

[blackheart]

So the Canadians want to try to pull a communist China on us?

They want to set up mass industrialization techniques and try to sell us goods that were prouduced 1/100th of the cost it would have been to make in the America and service our needs with their own?

 

[Red Stranger]

Artificially lowering the value of their money.

 

[Irish Caesar]

I'm not much of a fan of messing with the currency exchange rates...

But hey, do what you want. It's your money.