Comments from a Bank of Canada official may have pulled the loonie down in trading late Wednesday. It got off to an early jump rising about .75 cents US on rising oil prices, but it ended up closing down .78 cents to 103.48 cents US.
The drop came after Paul Jenkins, the bank's deputy governor, said Wednesday in Niagara-on-the-Lake, Ont., that the falling U.S. dollar poses the risk of "disorderly adjustment to global imbalances."
Derek Burlton, a TD Financial Group senior economist, told CTV.ca that Jenkins' statement is a polite way of warning of a currency crisis.
The loonie has shot up in value relative to the U.S. dollar, which has left Canada "bearing a disproportionate share of the adjustment," according to Jenkins' speaking notes posted to the central bank's website.
Finance Minister Jim Flaherty and Bank of Canada Governor David Dodge both made the same argument in Washington last month.
Government officials say that the U.S. dollar has depreciated by about 20 per cent since 2002. Canada's dollar and Europe's euro have each taken up about one-third of the slack.
Meanwhile, China's economy continues to steam forward, but its currency system doesn't allow the yuan to rise in value. "The yuan should be sharply stronger," Burlton said.
One of Jenkins' charts showed the Canadian and Australian dollars and the euro all rising dramatically against the U.S. dollar since 2002, while the yuan barely budged.
"All this points to the heightened need for more exchange rate flexibility on the part of other countries, particularly China and Asia more broadly," Jenkins said.
Flaherty will be attended an international economic meeting in South Africa this weekend -- as will his Chinese counterpart.
Federal officials say China has a huge current accounts surplus with the United States, meaning it sells far more to the U.S. than it buys in goods and services - an economic relationship aided by the yuan's relative value.
Canada has argued it's in China's interest to let the yuan rise in value against the U.S. dollar and cut into that surplus.
The currency shifts are being felt by more than just Canada.
During an appearance in Washington earlier this month, France's President Nicolas Sarkozy said, "If we're not careful, monetary disarray could morph into economic war."
As national economies become stressed by rapidly rising currencies, Burlton said economists fear governments could impose protectionist barriers, which would choke the trade that has kept the global economy humming.
Manufacturing hit hard
In Canada, the rising dollar has been felt most acutely in the manufacturing sector. Federal finance officials estimate that 130,000 jobs have been lost and real economic output in that sector has fallen by three per cent in the past two years as Canadian exports become more expensive in the U.S.
However, the overall economy remains strong, with unemployment at 30-year lows. But analysts say that job growth isn't occurring in the private sector but the public one.
Burlton said economists are worried more about looming risks to the economy, not the short term.
The loonie is currently trading around 104 to 105 cents US and surged to more than 110 cents US last week. However, many analysts think it should be valued in the 90 to 95 cents US range.
Jenkins noted the loonie's volatility and added in his notes: "(The) magnitude of recent appreciation appears to be stronger than historical experience would have suggested."
The weakening of the U.S. economy and a tightening of credit were all risks to Canada, he said.
While domestic demand is strong, net exports "have been a significant drag on growth," Jenkins said.
