|A Northern Enigma|
|Key Words||Currency Union, Exchange Rates, Economic Growth|
Many Canadians are upset; others are puzzled about the value of the Canadian dollar in comparison to the U.S. dollar. In April 1974, the Canadian dollar was worth $1.04. Since that time, over almost three decades, the Canadian dollar has declined steadily to a current value of about $.63. In 2001, the Canadian dollar lost 6.25 percent of its value despite an economy that is technically not in recession. The decline in the Canadian dollar has been a bonanza for American tourists, Canadian exporters and U.S. businesses interested in acquiring Canadian firms. On the other hand, Canadians that import American goods or vacation in Florida have been hurt by the devalued Canadian currency.
Canada adopted a floating exchange rate in 1970. Under a floating exchange rate system, market forces determine the value of the Canadian dollar. One explanation for the plight of the Canadian dollar is that the foreign exchange market simply prefers other currencies. These preferences, however, may not be without foundation. Economists say that the Canadian dollar has been undermined by an outflow of capital. A recent change in Canadian law, allowing holders of individual retirement accounts to increase their holdings of foreign securities from 20 to 30 percent, has probably added to the outflow. Prospects for productivity improvements and economic growth may also be a contributing factor. Capital equipment, especially the more sophisticated type, is imported from the U.S. As the American dollar increases in value, this equipment becomes relatively more expensive and Canadian firms have substituted relatively inexpensive labor rather than buying new equipment.
have proposed a currency union to include the United States, Canada and
Mexico as a solution to Canada's dollar problems. Not everyone supports
this proposal because it would require that Canada surrender its ability
to control interest rates, one of the country's most important tools for
influencing the direction of the economy.
(Updated February 13, 2002)
|Source||Anthony DePalma, "Showing in Canada: The Mystery of the Falling Dollar," The New York Times, January 9, 2002.|
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