The Weaker the Better?

We are told that a weak currency helps to increase the sale of our imports, which they do more often than not.  But, this is only a true benefit if the product does not require imported goods for its production. Not to mention, a weak dollar drives up the price of all end-user products, most of which line big-box store shelves.  The end result is reduced consumer spending.  In order to compensate for the fewer sales, retailers will often hike the prices of other products in an attempt to generate more revenue, which only contributes to the problem.  

If your business delivers goods or services, or if it depends upon utility costs to operate but your currency is losing value, then your overhead costs will increase.  In either scenario, you have only three choices; pass on the higher cost to the customer, absorb the higher cost and compensate by cutting quality, or take a financial loss. None of the above is favorable to business.  Clearly, the benefits of a cheaper currency are outweighed by the negatives.

A strong currency should be a priority for all governments.  Why?  Because every rich country under a floating exchange rate has prospered under a strong currency policy.  Between 1960 and 1990, the hottest currencies were the Japanese yen, the German mark, the Dutch guilder, and the Swiss franc.  Both the mark and franc started out at roughly $0.24CDN and climbed to $0.80 and near par, respectively.  In the sixties it took over 300 Yen to buy one U.S. dollar.  At its peak, it required only 88 yen to buy a dollar.  All four countries had low unemployment and prospered while their currency increased in value.

The 1990's belonged to the U.S. dollar as it soared against all currencies.  On January 21, 2002 the Loonie hit an all-time intraday low of $0.6175U.S.  During these 18 years, our economy did nothing.  We had high inflation, high interest rates, and above normal unemployment.  America, under a strong currency, boomed.  Its only major problem was the lack of skilled workers.  This was the period that gave birth to Silicon Valley.

From January 2002, the Loonie was the world’s best performer, only to close at an all-time high of $1.10U.S. in November 2007.  Between 2002 and 2007, Canada was amongst the most robust economies in the world.  Today, the hottest currencies are the Swiss franc and the U.S. dollar.  Guess what?  These two countries have the strongest economies.  

If history is about to repeat itself, Canada is in for below average growth. This should not be the case though because we have the best opportunities in the world.  Unfortunately, the Bank of Canada and Ottawa are intent on weakening us.  Sadly, they are going to succeed.  All the Bank of Canada must do is hike interest rates slightly and capital will flock here, improving our economy overnight.  Canada and the U.S. currently have identical trade deficits, our GDP growth is similar, and we have far less debt. We have far more resources, a better education system and a larger middle class. 

There is no reason why the Loonie should not be worth at least par.  Every day that it is not, is another day our dollar is undervalued against the Greenback. The longer our dollar continues to fall, the worse it will be for all Canadians.  A strong economy will only return when the dollar starts to rise and Ottawa rewards savers at the expense of the indebted.