Some plain talk about the dollar from Bank of Canada Governor Tiff Macklem

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“When our currency changes for reasons that are unrelated to Canada, in that case, it’s not acting as a shock absorber,” he said. “It’s becoming a force in its own right. It’s not offsetting something else; it’s becoming a force in the economy.”

If, say, oil prices rose, and the exchange rate stayed the same, the dollar would probably fade as a threat to the economic outlook. That’s because oil is Canada’s biggest export and we generally sell as much as transportation networks can handle. The windfall from a higher crude price would offset lost sales of other goods and services that were uncompetitive at a higher exchange rate. It’s unfortunate for those uncompetitive exporters, but the numbers even out from where the Bank of Canada sits.

It’s becoming a force in its own right. It’s not offsetting something else; it’s becoming a force in the economy

Bank of Canada Governor Tiff Macklem

But if oil prices don’t come back, or other commodities falter, then a stronger dollar is a negative variable that could impede the recovery. Macklem acknowledged on Dec. 15 in a speech to the Greater Vancouver Board of Trade that an elevated exchange rate was partly responsible for the unexpected export weakness that followed the Great Recession. When Poloz took over as governor in the summer of 2013, he said an export-led recovery was imminent, but it didn’t happen until much later in his term. The lesson is that policy-makers can’t take an export rebound for granted.

The dollar is “becoming its own source of drag,” Macklem said in the interview. “As we make our projections of the Canadian economy, it’s beginning to become a material factor. It’s on our radar screen. In our press releases, we highlight things that are material, that are on our radar screen, and that’s why you’ve seen it in the last couple of press releases.”

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