Challenges of a Strong Canadian Dollar


Saturday, April 10th, 2010

A strong currency in any country can give its people a sense of pride, but there are a lot of challenges, especially in the case of the Canadian dollar, which has been used to sitting quietly in the background at a much lower level than its U.S. counterpart.

That has now changed, and it should be years before we see anything change in that regard, as the strength of the Canadian dollar is related to its exports, and commodities will be strong for years to come, making it a sure bet the Canadian dollar will be too.

There are strengths and weaknesses in having a strong currency, and Canada now has challenges before it it hasn't faced in recent memory, and it will have to adjust, along with its businesses and citizens accordingly.

Now for the citizens of Canada who like to travel, the one bright spot for a stronger Canadian dollar is it is much cheaper to go on their vacations and get more for their dollar, as the exchange rates won't eat into it like it has in the past.

On the other end of the spectrum, the large number of Americans who normally come to Canada to vacation and visit, has been plunging, and with parity or possibly even the Canadian dollar rising above the value of the U.S. dollar, that will become more expensive for Americans, causing challenges in the tourist industry, which is a major one for the country.

Concerning the strength of the Canadian dollar, the Conference Board of Canada said this, "For the foreseeable future, Canada's solid banking system, solid domestic economy, relatively healthy fiscal situation and wealth in raw materials will continue to support a strong Canadian dollar."
 
Some of the answers to the strengthening dollar in Canada are to increase international investment and their own productivity.

One thing that is helpful with international investment is if you keep the business within the country, exchange rates are irrelevant if you're not transferring capital, as that's the time the strength or weakness of currency comes into play as far as cost of money goes.

Two strategies for Canada offered by the Board for businesses were these:

- Boost productivity through investment in equipment and machinery, skills upgrading and trade enhancement.

- Increasingly become international players -- inserting themselves into global supply chains through investment or the sharing of resources.

The productivity factor is especially important, as that's one thing that businesses and individuals can do in response to the new currency challenges in the country.

Productivity has slipped in Canada against its southern neighbor, and with a strong dollar that's bad news if Canadian businesses and workers don't respond to and understand the new economic world they now live in.

I agree with the assessment of the Canadian board that the dollar is going to remain strong for some time to come, and if there isn't a strong response, some of the usual strong industries in Canada are going to suffer immensely, especially the tourist and manufacturing sector, which have been strong because of a weaker Canadian dollar in the past, as doing business in or vacationing in Canada were less expensive. That is no longer the case.



Article by Gary B

The views expressed are the subjective opinion of the article's author and not of FinancialAdvisory.com



Tags: canadian dollar , commodities , currency , manufacturing , tourist industry

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