Loonie in its proper place, top banker says

In the closest he has come to publicly specifying the true value of the Canadian dollar, Bank of Canada governor David Dodge said yesterday the loonie may be very close to where it deserves to be against the U.S. dollar.

Testifying before the Senate banking committee for the last time, the outgoing central bank head said the currency's wild roller-coaster ride of the past several weeks remains largely inexplicable, but a loonie close to parity with the greenback is justified by fundamentals.The bank governor and Finance Minister Jim Flaherty have voiced concern about the value of the dollar in the past, but have steadfastly refused to peg it against its American counterpart. Last month, they complained at an international meeting of finance officials that Canada had absorbed one-third of the greenback's depreciation since 2002.Dodge stuck by that number yesterday, saying that Canada has taken a disproportionate hit from the U.S. dollar's decline even though Canada accounts for about 16 per cent of U.S. trade, the same as Europe and China."

But we should be quite clear that at least some of that correction is entirely appropriate because we've had a big improvement in our terms of trade against the U.S.," he told the senators."If you leave aside this awful experience with the spike that took us from $1 to $1.10 and back to $1 in the course of several weeks, the answer is that more or less the move from a mid-60s cents value to the mid-90s cents value accords with what was going on from a domestic perspective."Countered criticsDodge countered critics who urged him to cut interest rates to rein in the dollar and save the manufacturing sector, saying this would not have helped factories and "we would have simply had inflation higher than what we got now."

"In the real sense, Canadian manufacturers would not be any better off because they'd be paying higher wages and higher domestic costs."Dodge, who will hand over the central bank's top job to former Finance Department official Mark Carney at the end of January, backed up his designated successor's testimony Wednesday that it would be a mistake to peg the loonie at a fixed value against the U.S. dollar, or for Canada and the United States to adopt a single currency."Monetary unions should follow economic unions, not vice versa," he said. "Without that, a single-currency union is likely to bring trouble."He predicted growth will slow through the current quarter and the first half of next year before recovering later in 2008.