Welcome to Canadian dollar Guest | RSS

Canadian dollar

Wednesday, 2017-09-20, 4:29 PM
Main » Articles » June 1970-present

The dollar in the 1990s
While the Canadian dollar began the 1990s on a strong note, it weakened against its U.S. counterpart through much of the decade, declining from a high of US$0.8934 on 4 November 1991 to close the decade at US$0.6929.

Through 1990 and most of 1991, the Canadian dollar climbed against its U.S. counterpart (and against major overseas currencies). This was largely due to a further tightening of monetary policy within the context of inflation-reduction targets announced in February 1991, and widening interest rate differentials that favoured Canadian instruments.

After cresting in the autumn of 1991 at its highest level against the U.S. dollar since the late 1970s, the Canadian dollar began to depreciate, falling sharply through 1992 to close the year at US$0.7868. The gradual, but sustained decline in the value of the Canadian dollar, which continued through 1993 and 1994, reflected various factors. With inflation falling to—and for a time below—the target range established in 1991 and with significant unused capacity in the economy, the Bank of Canada sought easier monetary conditions through lower interest rates. Downward pressure on the currency also reflected increasing concern about persistent budgetary problems at both the federal and provincial levels, softening commodity prices, and large current account deficits. The international environment was also unfavourable. The Exchange Rate Mechanism in Europe came under repeated attack through 1992 and 1993, followed by rising U.S. interest rates through 1994. The Mexican peso crisis of 1994 and early 1995 also drew investor attention to the weakness of Canada’s fundamentals, especially its large fiscal and current account deficits.

A degree of stability in the Canadian dollar was temporarily re-established through 1995 and 1996 for a number of reasons. These included higher short-term interest rates (at least early in the period), evidence that fiscal problems were being resolved, a marked improvement in Canada’s balance of payments, partly because of strengthening commodity prices, and a diminished focus on constitutional issues. The Canadian dollar traded in a relatively narrow range close to US$0.73 through much of this period.

Introduction of inflation targets

In February 1991, the government and the Bank of Canada set out a path for inflation reduction, with the objective of gradually lowering inflation, as measured by the consumer price index (CPI), to 2 per cent, the midpoint of a 1 to 3 per cent target range, by the end of 1995. An explicit commitment to an inflation target provided a nominal anchor for policy, helped to shape market expectations about future inflation, and improved central bank accountability. The target range of 1 to 3 per cent was subsequently extended on three occasions to the end of 2006. With much of the short-run movement in the CPI caused by transitory fluctuations in the prices of a few volatile components (e.g., gasoline), the Bank focuses, for operational purposes, on a measure of core CPI inflation that excludes eight of the most volatile components of the CPI and adjusts the rest to remove the impact of changes in indirect taxes.

Renewed weakness in the currency began to emerge in 1997 and became increasingly apparent in 1998, despite strong domestic fundamentals—very low inflation, moderate economic growth, and solid government finances. Once again, the slide of the currency could be partly attributed to external factors in the form of lower commodity prices. Commodity prices began to soften in the summer of 1997 but subsequently weakened significantly, owing to a financial and economic crisis in emerging markets in Asia. In this regard, the weaker Canadian dollar acted as a shock absorber and helped to mitigate the impact of lower commodity prices on aggregate demand and activity in Canada.

The large negative interest rate differentials that had earlier opened up between Canadian and U.S. financial instruments also weighed against the Canadian dollar, as did the U.S. dollar’s role as a safe-haven currency during times of international crisis. Rising U.S. equity prices, reflecting a pickup in productivity growth and large capital flows into the high-technology sector, were another background factor that supported the U.S. currency against all others, including the Canadian dollar. This factor persisted though the rest of the decade.

During the summer of 1998, the crisis in emerging-market economies widened and intensified with a debt default by Russia and growing concerns about a number of Latin American countries. The Canadian dollar touched a low of US$0.6311 on 27 August 1998, before recovering somewhat following aggressive action by the Bank of Canada, including a 1 percentage point increase in short-term interest rates and considerable intervention in the foreign exchange market. While a lower Canadian dollar was not surprising, given the weakness in global commodity prices, the authorities had become concerned about increased risk premiums on Canadian-dollar assets and a potential loss of confidence on the part of holders of Canadian-dollar financial instruments. Interest rate reductions by the Federal Reserve Bank and the return of a modicum of stability in financial markets following action by the Federal Reserve to calm markets after the collapse of Long-Term
Capital Management (LTCM), permitted the Bank of Canada to reduce Canadian interest rates without undermining confidence in the Canadian dollar.

Exchange market intervention

The Bank of Canada last intervened in the foreign exchange market on behalf of the government on 27 August 1998. Up to this point, Canada’s policy had been to intervene systematically to resist, in an automatic fashion, significant upward or downward pressure on the Canadian dollar. In September 1998, the policy was changed as intervention to resist movements in the exchange rate caused by fundamental factors was ineffective. Neither the government nor the Bank of Canada target a particular level for the currency, believing that the value of the Canadian dollar is best set by the market. Over time, the value of the Canadian dollar is determined by economic fundamentals. Canada’s current policy is to intervene in a discretionary manner in foreign exchange markets only on the most exceptional basis, such as periods of market breakdown, or extreme currency volatility.

The final year of the decade saw the Canadian dollar recouping some of its earlier losses against the U.S. dollar as the international financial situation improved, and investors focused on Canada’s strong economic fundamentals, including a narrowing current account deficit and strengthening global commodity prices.

Related Articles

Category: June 1970-present | Added by: gogoshvab (2010-02-20)
Views: 802 | Tags: dollar | Rating: 0.0/0