Monday, May 25, 2009

Action Needed to React to Plummeting US Dollar

I'll start by saying I know that currency variation is complicated. There are such a variety of factors that bank economists with powerful models can rarely agree. But I will say when a currency jumps like the Canadian Dollar has done recently there's gotta be a dominant explanation. There have been 2 major explanations thrown around. 1 - Rising Energy Prices. 2 A Weak US Dollar. I'd say at this point rising energy prices are simply a function of the weaker US dollar. This video below is a fun demonstration of how much extra US dollars have been printed and why the US currency will continue to weaken.

That's a problem for everyone. American consumers are going to face more costly imports. However, I believe the US administration is content to let this happen because allowing their dollar to fall will make their exports appear cheaper.

However, Canadian exporters are already finding themselves getting a body blow from this fluctuation. Our currency has increased by about 15% since March, meaning a Canadian exporter who is paid in US dollars is receiving 15% fewer Canadian dollars even while their costs remain the same. This threatens to decimate the Canadian economy while they are fragile. Our government needs to (A) pressure the US government to reign in their money supply, or (B)consider printing more of our own money as a response.

A is much preferable to B, but if you can't beat 'em, join 'em.

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