Value of U.S. Dollar Continues to Slide in June; Value of Canadian Dollar Rises
Alex Carrick -- July 11, 2007
The U.S. dollar (-0.5% versus the Euro) continued to slide versus most other major international currencies in the month of June 2007. The only significant exception was the value of the U.S. dollar versus the Japanese yen (+1.3%), end of May to end of June. The Canadian dollar made a further advance versus the U.S. dollar in the latest month (+0.6%) and was also up versus most other major currencies. The changes are set out in the accompanying table.
Most Significant Longer-term Changes
Five Main Determinants of Currency Value
Canada is performing relatively well according to the first five of these criteria and its currency is receiving an extra boost from high world oil prices. Over the last couple of years, the Canadian dollar has virtually moved in tandem with the price of oil. Oil and gas net exports have taken over from forestry products and autos as the main source of Canada’s trade surplus. (Canada consistently runs a merchandise trade surplus.)
Current weakness in the value of the U.S. dollar is primarily a function of two factors — a large goods trade deficit and little upward movement in interest rates at a time when many other nations are raising policy-setting rates to combat overheating in their economies.
Three Major Currency Impacts on Construction
Canada has been partially protected on the commodity-price front by the rise in value of the Canadian dollar. This is not only true with respect to oil and gas, but also applies in terms of other commodities that have a high construction-input component, such as copper in plumbing and wiring. The impact of higher base metal prices has been blunted by the climb in value of the Canadian dollar.
Looking beyond U.S.-Canada domestic supplies, other construction materials can be supplied by foreign sources, where currency movements may be a significant factor in the cost (e.g., cement from Mexico and steel from Spain).
Currency Value or Interest Rates — Establishing the Sequence
However, there comes a crisis-point when a currency’s value can dictate interest rates. History has shown that a particular nation’s currency can begin to fall in such a manner and to such a degree that a measured drop and moderation in policy response are no longer possible. Foreigners begin to withdraw capital in the expectation of further currency declines. (A shortfall in goods and services trade needs to be made up by a net inflow of foreign capital to maintain currency stability).
At that point, interest rates have to be raised and the control of monetary policy slips out of the home government’s hands. This is one future scenario that has been proposed by some analysts in connection with the U.S. economy, due to its large trade deficit. Such an imposed increase in interest rates is difficult on the economy (and construction activity) for an extended period of time.
Currency Value/Foreign Investment/Construction Connection
However, there are several factors which help to explain the current takeover frenzy. 1) Corporate profits around the world have been rising since 2001 and war chests have been built up to finance acquisitions. 2) The jump in commodity prices makes Canadian resource-based firms especially attractive. 3) The rise in value of the Canadian dollar means that there is an added bounce (after currency conversion) to the profits being reported by Canadian firms to their U.S. headquarters. (Many Canadian subsidiaries are “heroes” in the eyes of their U.S. head offices as the Canadian dollar continues its climb.) 4) Ongoing strength in the Canadian dollar will add to the asset value of Canadian capital investment on the part of U.S. investors, and will make Canadian assets relatively more attractive than U.S. assets to all international investors.
There is one additional aspect to foreign takeovers that has implications for construction. One hopes that the battle for control does not leave the acquiring firm so deep in debt that it is unable to undertake major investments that will revitalize the firm and make it more competitive internationally. When the acquiring firm is eager and capable of undertaking the rationalizations and investments that are needed, this can be quite positive for the overall investment climate, construction and the total economy. A prime example of the positive implications of a foreign takeover is occurring in Sudbury, Ontario where Brazilian firm Companhia Vale do Rio Doce (CVRD) has announced its commitment (since taking over Inco) to increase deep recovery of ore deposits.
Story for Another Day
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