Canada Intervenes to Avoid Currency Weakening
DOWNWARD pressure on the Canadian dollar in world currency markets forced Canada's central bank to intervene more forcefully last week to support its currency.
The Canadian dollar's value had fallen from 87 United States cents at the beginning of the year to 80.62 cents last week, dropping 2 cents in the last week alone.
Eager to avoid the sort of nose dive facing some European currencies, the Bank of Canada raised the interest rate it charges on loans to commercial banks to 5.69 percent on Thursday, up from 5.34 percent the week before.
Analysts expect the move to stabilize the currency's value. The Bank of Canada has intervened in the foreign-exchange market several times in the past two weeks as the dollar's slide accelerated along with turmoil in European markets. Economists said the weakness was caused mostly by investors concerned about turmoil on world markets. Investors were also demanding a higher return for placing investments in bonds and equities denominated in Canadian dollars for reasons that include:
* The unresolved constitutional crisis that comes to a head in an Oct. 26 national referendum. This has caused uncertainty because of the financial consequences for both Quebec and the rest of Canada if the outcome is not a strong "yes" to unity.
* The two-year-long Canadian recession.
* The belief, held by currency traders, that the Bank of Canada is willing to see the currency drop in value to some degree because inflation appears to be under control.
"The [Bank of Canada] has seen room to run and adopted an easier monetary policy because they are ahead of their inflation targets," says Michael Gregory, an economist with Royal Bank of Canada. "Both interest rates and the Canadian dollar have fallen significantly already this year."
The central bank had eased its bank rate from 7.67 percent at the beginning of the year to as low as 4.93 percent on Sept. 3, before it began slowly raising rates again. Canadian inflation has been only 1.4 percent so far this year compared with 5.6 percent last year, according to Statistics Canada.