Canada’s ‘loonie’ gains on U.S. buck

TORONTO — Five years ago, when Canada’s dollar was worth 64 cents and the greenback ruled supreme, departing U.S. tourists would dump their leftover Canadian dollars on the table, recalled Leviticus Le Compte, a waiter at the Duke of Devon, a downtown Toronto eatery.

Now, with the Canadian dollar touching a 33-year high of 94 cents and some analysts predicting it soon will outrank the U.S. buck for the first time since the energy shocks of the 1970s, Mr. Le Compte said American dollars have lost a lot of their appeal. “I just exchange them right away. No point in carrying them around.”

The “loonie,” as Canada’s loon-embossed dollar coin is familiarly known, “has been on a nonstop ascendancy since early 2002,” said Toronto-based Scotiabank deputy chief economist Aron Gampel, driven “by this spectacular boom in global demand for raw materials and commodities Canada has in abundance.”

The boom is driving up housing and labor costs, especially in oil- and gas-rich Alberta, despite a recent slowdown in drilling. This has fueled inflation worries, prompting several upticks in the Bank of Canada’s interest rate to 4.25 percent — another factor in the Canadian dollar’s attractiveness.

It’s not just the 50 percent increase in the value of the Canadian dollar that is shaking things up north of the border. It’s also the speed with which it’s happening — up more than 10 percent in just a few months.

While American imports and U.S. vacations are cheaper — U.S. shopping trips by Canadians are up, but still well below pre-9/11 levels — contracts negotiated in U.S. dollars are worth less.

Alberta Finance Minister Lyle Oberg has warned that the shrinking value of U.S. dollar contracts for the province’s oil and gas means projected government revenues will drop by $1 billion to $2 billion this year.

With 80 percent of Canadian exports destined for U.S. markets, the rising Canadian dollar has hit Canada’s manufacturing base hard. Some 160,000 manufacturing jobs have been lost in the last three years, mostly in the population centers of Ontario and Quebec. Much of this drop is a result of the shrinking North American auto industry that was once the economic engine of the central Canada-U.S. border region.

While the Canadian dollar is acting like “a petro-currency,” said Don Brean, a professor of finance and economics at the University of Toronto, it’s also benefiting from a global shift away from the U.S. dollar.

Canada’s currency, like those of Europe and Asia, is going through “a decoupling process from the U.S. dollar,” he said, explaining that international investors are skittish about the greenback “and they don’t want to hold assets in a currency that’s falling in value.”

That sentiment has spurred a spree of mergers and acquisitions, with foreign investors buying major Canadian resource-based companies like Inco and Falconbridge.

The muscular Canadian dollar is a wake-up call for industries that prospered despite low productivity levels while the currency was weak, Mr. Brean said.

Not so long ago, with the federal and provincial governments mired in deficits, the Canadian dollar was derided as “the northern peso.” But after a decade of tough economic restructuring leading to trade surpluses and a robust economy, experts are calling it the “northern rocket,” he added.

Alan Boras, a spokesman for Calgary-based EnCana Corp., a company with oil and gas interests in Canada and the U.S., said the rising loonie will wipe a staggering $113 million off his company’s income from American contracts. But, he added, this is offset by cheaper U.S. equipment, increased demand for the company’s products and a rise in commodity prices.

“China and India are moving from bicycles to cars, and they want to step up to a first-class lifestyle. That takes energy, and that means petroleum for the foreseeable future,” he said.

Mr. Gampel at Scotiabank said Canada — the world’s largest producer of uranium — also stands to benefit as the world takes a second look at nuclear power. There are currently 275 nuclear plants in the works globally, he noted.