CANADIAN
DOLLAR AND CANADIAN ECOMONY
Global
issues have dominated management discussions in the 1980s (Eaker,
Grant, 1991). In investment management, particularly
currency risk management, there has been considerable research and the role of
currency risk has been closely examined. Most economists argue that
financial integration leads to
monetary integration, which means
countries that have a common currency like the European Monetary
Union (EMU) tend to have more extensive international financial
activity (Speigel, 2004). Monetary integration reduces currency risk,
and it makes a borrowing nation more averse to defaulting on its debt
obligation in fear of avoiding any economic sanctions (Spiegel,
2004). Lending to monetary union member countries reduces currency
risk because debts are serviced in the union currency.( Laider 2002).
Canada has had a flexible
exchange rate in place for over three decades.
Canada has an overwhelmingly high rate of foreign trade with the
United States which places emphasis on the bilateral Canadian – US
dollar exchange rate (Laidler, 1999). Proper currency risk management
needs to be in place to minimize the currency risk since there is no
monetary integration in the case of North America. Canada’s money
gives a strong measure through which the country’s vast economic
and political pasts were founded. There have been serious economic
pressures on Canada and the Canadians had to deal with them, ever
since the paper money was introduced in 1685 by de Meulles. Harder
economic times followed in the 1930 during the great depression and
several economic models were put to test with the final emergence of
the Bank of Canada. (CTV.ca News Staff 2007)
Canada’s
strong economic forces have seen the US coming to its side by either
bilateral business ties or for the formation of trade blocs. In the
reverse the Canadian link with the UK lessened because of the North
–South ties. The Canadian eventually came to the decision that the
dollar was stronger and hence adopted it since 1850. But still the US
dollars and UK pounds have remained in the circulation in the
Canadian economy, creating the never ending foreign exchange tension
there. There has been a one –to–one ratio of exchange rates
between the Canadian dollar and US dollar with close reference to the
gold standard mark. This mutual economic tie has lead to commercial
and financial prosperity between the two countries. (Laider 2002).
However,
the Canadian economy which is mostly export oriented is quite
different from the US economy which is manufacture based and a
supplier of goods. Canada, at the moment strives to direct
macroeconomic policy to attain domestic policy objective, but has
been slowed down by the tough exchange rates. The tactic has been
therefore to adopt a floating exchange rate knowing that there is no
best rate worldwide. They also rely on trade offs to fit in to
certain circumstances. From 1930 to 1999 the Canadian Dollar has
undergone numerous tests and has had to react by breaking links,
fixing rates, floating of currencies, making exchange rate regimes
and to having flexible exchange rates and independent monetary
policies. Harry Johnson, a
Canadian monetary economist, noted that “
flexible exchange rate
is not, of course, a panacea; it simply provides an extra degree of
freedom, by removing the balance-of-payments constraint on policy
formulation.” (Johnson 1972).
In
Canada, the reason for floating the Dollar was to prevent importing
the US inflation. The argument behind flexible exchange rates in
Canadian Economy has been to allow other goals to be met, definition
of monetary order, and a workable fiscal policy. (Laider 2002). This
system has just been in stronger operation in the last 10 years. It
has helped to have the external value of the Canadian currency to
resist shocks. (Macdonald 2008)
References:
Laider
David, (2002). A history of the Canadian Dollar, Available at
http://www.bankofcanada.ca/en/dollar_book/concluding.pdf
. Accessed
on January 25, 2008.
CTV.ca
News Staff (2007). Dollar
briefly hits parity, highest level since ''76. Available at
http://www.ctv.ca/servlet/ArticleNews/story/CTVNews/20070920/lo onie_story_070920/20070920?hub=TopStories
. Accessed on January 25,
2008.
Macdonald,
Don (2008). Canadian economy headed for downturn: BMO: (2008).
Available at
http://www.canada.com/montrealgazette/news/s tory.html?id=076bb7fc- ee8d-4033-96c6-e065f83227bd&k=16715
. Accessible on January 25, 2008.
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