Canada, Hurt by U.S. Slump, Says Others Must Do More
Bank of Canada Governor Mark Carney and Finance Minister Jim Flaherty said other countries must make more of an effort to stabilize the world economy after Canada has done its part.
Carney said imbalances that world leaders have identified as threats to a global recovery are between countries like the U.S. that run large trade deficits and surplus countries like China. Flaherty said Asian countries must allow their currencies to float more freely.
“There is no question about Canada’s contribution already to this effort and the real issues lie elsewhere,” Carney said in an interview in Istanbul, where he attended a meeting of G-7 officials with Flaherty.
The G-7 repeated its statement that “excessive volatility and disorderly movements” in exchange rates threaten the global recovery. While the statement did not single out the U.S. dollar, it came at the end of a week in which policy makers from Canada to France said a sliding dollar risks impeding their recoveries from the deepest global recession since World War II.
The U.S. dollar has dropped 14 percent against the Canadian dollar over the past six months. The Canadian currency strengthened 0.8 percent to C$1.0716 per U.S. dollar at 1:27 p.m. in Toronto, from C$1.0802 on Oct. 2.
Canada, which had a three-decade run of trade surpluses until last December, has posted record deficits this year amid slumping sales to U.S. On arriving to Istanbul, Flaherty said he was concerned about the U.S. dollar’s weakness.
Policy Changes
Carney said a rebalancing of global growth will require the narrowing of the “orders of magnitude” of current account surpluses and deficits through changes in macroeconomic, structural and exchange rate policies in some countries.
“Some of those shifts in policies have begun,” Carney said, adding that rebalancing of the global economy “will also take a shift in relative exchange rates.”
Carney declined to say whether the reference to excessive volatility in the G-7 statement was a reference to the U.S. dollar.
“We’ve seen tremendous volatility over the last year. I think anybody who is active in the currency market would confirm that,” Carney said. “We’ve seen tremendous volatility across a range of major currencies.”
Carney told reporters on Oct. 3 the G-7 statement should be seen in the context of encouraging sustainable global growth.
Major Imbalances
Asked in yesterday’s interview whether Canadians would need to endure an even stronger currency to help correct global imbalances, Carney said: “The major imbalances are not between the U.S. and Canada, they are between major deficit countries, which include the United States, and major surplus countries, such as China.”
The lack of flexibility in some Asian currencies “creates imbalances, it creates distortions in the world marketplace and that’s what we are trying to avoid,” Flaherty said. “If we are going to have our currencies as market currencies then we all need to have our currencies fluctuate.”
Carney repeated concern that the strong Canadian dollar is a risk to the bank’s inflation forecast. He said the bank looks at currency movements in the context of their effects on inflation, saying the currency “is a downside risk to inflation, which is why we mention it.”
Recent strength in the dollar reflects higher commodity prices and “generalized weakening” of the U.S. dollar, Carney said in a speech last week, without saying how much each factor contributed. Bank of Canada officials have said in the past the bank may use monetary policy to counter movements in the currency not related to Canada’s economic fundamentals.
Carney also commented yesterday on data last week that showed the country’s economy unexpectedly stalled in July and U.S. job losses unexpectedly accelerated as “consistent with the expected unevenness of the recovery.”