On June 8, the Canadian dollar was worth US$.80. Today, it’s worth just 73 cents. That’s a nine per cent decline in just three months.
The reason is clear. The Federal Reserve – US central bankers – have taken the bit between their teeth and launched a to-the-death fight with inflation. They have told the world that they will not stop raising interest rates until something is broken. That message is really for Americans, to get them to understand that unemployment has to go up. The fact that something may break outside of the United States is only in their peripheral vision.
Believe it or not, the Canadian dollar is the best performing G10 currency against the US dollar. Its decline is despite a better performing economy, a current account surplus, the best terms of trade on record and our own Bank of Canada’s determination to vanquish inflation. The British pound is at
all-time lows against the greenback, as is the euro. Both China and Japan have intervened in foreign exchange markets to keep their currencies from falling further. Everything, including gold, is falling in value against the mighty US dollar.
This makes everyone’s economic situation worse. For Canadians, it means it’s harder to fight inflation – everything we buy from America is more expensive. Snowbirds who customarily go south for the winter are going to find it much more expensive if they have not yet exchanged their loonies for greenbacks. The Bank of Canada and the US Fed are now a tag team in the race to slay the inflation dragon. Next rate hikes:
Canada – October 26, US – November 2; after that Canada December 7, US December 14. And so it goes.
For the European Union, the world’s third largest economy after the US and China, the problems are a little more intense. The EU is made up of more than two dozen countries with varying degrees of economic health. Germany, with the strongest economy and most influential has been instrumental in keeping EU interest rates low so that weaker counties in Europe’s south such as Italy, France, Spain, and Portugal could finance their debts and deficits. But soaring bills for electricity, fuel and gas have weakened businesses and individuals’ spending power and sent inflation to eight per cent or more. With the euro at a 20-year low against the US dollar, the European Central Bank has been forced to raise interest rates for the first time in more than a decade.
The impossible dilemma is that rising rates make borrowing costs disproportionately higher for the weaker countries as investors demand a bigger premium to hold their debt. And it is constitutionally “verboten” for Germany to guarantee their debts. This has been causing chaos across the EU and warnings about possible country bankruptcies. The situation is most ominous in Italy, where the September 25 election results are the culmination of excessive debt, political instability, a declining standard of living, widespread voter disillusionment and questions about Italy’s future within the European Union.
It won’t be known for a while whether Giorgia Meloni, the
hard-right leader of a party descended from post-Fascist roots will form a stable government. She campaigned against gay-rights, European bureaucrats and illegal migrants. Ms. Meloni — if she is named prime minister by the President of the Republic — would also make history as the first woman to lead Italy. There is a lot at stake — the future direction of Italy, the stability of the EU itself, and the counter-reaction of the US Fed (and Bank of Canada) when what’s in their peripheral vision
comes into central focus. Between now and then, strap in for a bumpy ride in both the stock market and the economy.
Dian Cohen, C.M., O.M., economist
cohendian560@gmail.com
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