OTTAWA - The dramatic rise in the Canadian dollar is putting Canada's economic growth in peril, central bank No. 2 Paul Jenkins warned as the currency held Wednesday around four cent above its American counterpart.
The Bank of Canada's senior deputy governor told the Ontario Economic Summit in Niagara-on-the-Lake, Ont., that while domestic demand in the economy remains strong, it is uncertain how long that momentum can last if the loonie continues to reside in the currency stratosphere.
But net exports as a result of the strong dollar are starting to drag down the Canadian economy, he said, adding: "If recent levels of the Canadian dollar were to persist, the risk is that output and inflation would be significantly lower."
After a record selloff Monday the loonie has retraced some of its losses and was trading above $1.04 US in midmorning Wednesday, near the 50-year high for the currency.
In midday trading, it edged down 0.17 cent US to 104.09 cents US and has steadily lost ground since it hit a record high of 110.31 cents US a week ago, representing a rise of about 25 per cent this year.
Jenkins' comments, contained in notes from his morning address posted on the Bank of Canada website, reinforced the message finance minister Jim Flaherty is expected to take his counterparts at this weekend's Group of 20 nations meeting in South Africa.
The central bank official said the precipitous fall of the U.S. currency is becoming a major headache for the Canadian and world economies, increasing the risk of "disorderly adjustment to global imbalances" and increased risk of protectionist sentiment.
What's more, he said, Canada is bearing the biggest brunt of the U.S. dollar plunge. Senior government officials estimated Tuesday that Canada and Europe, whose economy is about 10 times larger, are both absorbing about an equal amount of the U.S. depreciation, about one-third each.
"All this points to the heightened need for more exchange rate flexibility on the part of other countries, particularly China and Asia more broadly," Jenkins said.
"The G20 meeting this week in South Africa offer an excellent opportunity for focused discussion of these issues."
At Tuesday's briefing in advance of the G20 summit, senior government officials said there were no plans for Canada and Europe, which has also complained about the currency volatility, to gang up on China to hike the value of the yuan.
They said their intent was to make it clear to China that it was in its own interest to have a realistic value for its currency, so that trade imbalances with the U.S. and Europe don't get so out of whack that they threaten the global economy.
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