Okay, perhaps this topic isn’t timed terribly well, on a day when the loonie jumped nearly 4 cents versus the U.S. dollar, but the overall trend for the Canadian dollar since the start of the recent financial crisis has been down, and in a big way. I’ve had many questions on the topic, which all pretty much boil down to this: if the American economy is doing so poorly, the Federal Reserve is lowering rates down to near-zero, and the government is borrowing money like it grows on trees, how come the greenback is still doing so well against most world currencies? It’s a 3-reason answer.
- The Canadian dollar is now a petro-currency. Canada’s exports consist mainly of resources, and more specifically, oil. With the slowing global economy, oil prices have fallen dramatically, dragging down the Canadian dollar along with it. Canada’s ‘fortunes’ are linked to the prices of the various resources we export. Although our financial system has weathered the brunt of the storm, other countries will experience slower growth, which means less oil consumed and slower consumption of base metals, hampering our economy nonetheless.
- Supply. Although the U.S. Federal Reserve has been pumping money into the banking system to lubricate the gears, many banks are hoarding money, not willing to lend. Of course this defeats the point of the money inflows to the market, but despite the talk of hundreds upon hundreds of billions of dollars, not much of it is seeing light outside the banks.
- Demand. Despite everything that’s happened in the United States, the greenback is still the choice currency during flights to safety. It is one of the global currencies that almost any business can be done with. In times of uncertainty, the U.S. dollar is the fallback for many people.
So despite a weakening U.S. economy, low interest rates, and a large money supply, its dollar still remains the de facto standard for world trade. Whether this financial crisis ends up being a turning point for that fact remains to be seen.