Bloomberg News

Harper Says Canada Would Prevent Speculative Dollar Move

September 21, 2011

(Updates with Harper comment in 14th paragraph.)

Sept. 21 (Bloomberg) -- Prime Minister Stephen Harper said Canadian policy makers are prepared to act to stem an appreciation of the country’s currency caused by speculative capital inflows.

Harper, speaking in an interview at Bloomberg’s headquarters in New York, said that while he doesn’t think Canada will attract “extreme” flows of capital because of the country’s close economic links with the U.S., the Bank of Canada isn’t likely to tolerate any appreciation that undermines the country’s economy.

Canadian monetary authorities “would be prepared to intervene if they thought there were movements in the currency that were contrary to the country’s interests and not being driven by actual underlying fundamentals,” Harper said in the interview.

Canada has received C$137 billion ($137 billion) in net capital and financial flows since the last quarter of 2008, Statistics Canada data show, more than the previous 34 years combined. Most of the capital has come from the U.S., the data show.

Harper said he doesn’t want to see another “speculative spike” like the one in 2007, when the currency rose to a record high about $1.10. The Canadian dollar was trading at 99.68 U.S. cents at 3:04 p.m. in Toronto today. One U.S. dollar buys C$1.0032.

Expressed Concern

“As you know we did have a speculative spike on the currency I think in 2007 and as you know I did eventually express my concern about,” Harper said. “I would not want to see an incident like that repeated. I don’t believe under the Bank of Canada today it would be repeated.”

Harper said if a deterioration of the U.S. economy triggers capital outflows, those funds won’t likely all come to Canada.

“I just don’t see that happening on an extreme level,” Harper said. “People understand that if the American economy is in trouble that that’s going to have some impact on Canada.”

Harper said that the currency’s strengthening over the past decade has been “to a large degree a positive reflection on the country’s economic state and its economic policies.”

While Harper said there is some evidence of competitive currency devaluations, particularly by the Chinese, he defended the move by the Swiss National Bank to cap gains in the franc. The SNB imposed ceiling of 1.20 against the euro on Sept. 6 and pledged to purchase foreign currencies in “unlimited quantities” to protect the economy. The franc’s ascent to a record last month has hurt some of the country’s largest companies including foodmaker Nestle SA and sparked an economic slowdown in the second quarter.

‘Defend Themselves’

“I would distinguish the Swiss case somewhat,” Harper said. “I don’t think the case of Switzerland is being driven by a desire to move away from market fundamentals.”

“The Swiss are simply trying to defend themselves from speculative movements and I think one would understand under some circumstances that’s necessary,” he said.

While central banks from Switzerland to Japan have sought to offset currency gains through intervention, and emerging markets have erected capital controls, Canadian officials have argued Group of 20 countries should have freely floating exchange rates and no capital restrictions.

“We understand there are upward pressures on the dollar,” Harper said. “As long as we think those are economically based, the government is committed to flexible exchanges.”

No Major Changes

Harper also said he doesn’t anticipate any major changes to the Bank of Canada’s mandate - to set policy aiming for 2 percent annual inflation - which expires at the end of this year.

Policy makers have been studying whether to target the level of prices instead of the inflation rate, whether to target a lower inflation rate and how monetary policy should deal financial stability issues.

“Realistically, I don’t see any radical changes to the bank’s mandate,” Harper said. “I’m not anticipating significant changes to the mandate but we are reviewing those issues.”

--Editors: Paul Badertscher, David Scanlan

To contact the reporter on this story: Theophilos Argitis in New York at targitis@bloomberg.net

To contact the editors responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net; David Scanlan at dscanlan@bloomberg.net.


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