money
... But, all together, it created an extreme result of loss for the Canadian dollar. The four factors mentioned were largely the cause of the decline of the Canadian dollar. “Interest rates set the amount of interest charged for loans. But, more importantly interest rates also set the returns on financial assets such as bonds.” Therefore, if interest rates are high, then investors are more likely to buy Canadian bonds from which they will get a higher return on their investments. This higher level of investment increases the demand for and the value of the Canadian dollar. However, over the last decade, the Bank of Canada kept interest rates low relative to the United States. Another factor included the “Debt/GDP ratio which refers to the amount of government debt relative to a country's income.” A high debt/GDP ratio will make a country less attractive to investment and put downward pressures on a currency. “The preferred debt/GDP ratio is 40%.” During the 1990s, Canada's debt/GDP ratio fell to 64%. However, this ratio remained far above the preferred level. The third factor had to do with Quebec separatism. If Quebec separates from Canada, many suggest the “transition will cause great economic disruption and result in weaker economies for Quebec and the rest of Canada.” The ongoing threat of separation makes Canadian investment less attractive and places downward pressures on the Canadian dollar. The last factor was in correspondence with declining commodity prices. “As a commodity producer (i.e. raw materials such as lumber or minerals), the Canadian economy is stronger when commodity prices are high.” During the mid-90s, commodity prices began to fall drastically. This makes Canadian investment less attractive and puts downward pressure on the dollar. These overwhelming factors, all together contributed in the downfall of the dollar through the 1990s and continue to be a real problem. Even though the extent of the problem may have decreased, we are still far from a solution. An exchange rate is always expressed in terms of two currencies, there are always two sides to the same coin. In our case, a low Canadian dollar on one side and a high U.S. dollar on the other side. “The question is not necessarily ‘why the Canadian dollar is so low?’ but ‘why is the U.S. dollar so high?’” This may give us some ideas and approaches that should be done to raise the value of the Canadian currency. First of all, the U.S. dollar has indeed appreciated strongly against most major currencies, so perhaps the right question to ask is what is driving the surge in the U.S. dollar. “It has been argued that the U.S. dollar is often viewed as a ‘safe haven’ in tumultuous times.” But this alone cannot explain the continuing rising of the U.S. dollar. Other explanations have pointed to the attractiveness of investment opportunities in the United States. If this is true one must ask why the investment opportunities in Canada look less attractive. First of all, the Bank of Canada has the instruments to stabilize the exchange rate. If it raises interest rates, this tends to strengthen the dollar. However, “the Bank is already committed to one objective, price stability.” So if the Bank of Canada were to increase interest rates to boost the value of the Canadian dollar, “it would not pursue the price stability objective at the same time, because monetary policy can only have one target at a time.” Raising interest rates makes money affordable, and businesses may postpone investment. Propping up the value of the Canadian dollar therefore comes at a price. Many economists think that this would be too high a price to pay during a time of unsustainbility in the stock market. The other question that can be raised is whether a low Canadian dollar is beneficial for the greater good of Canadians. In fact, there are several benefits of a low Canadian dollar. For example, a lower Canadian dollar makes import purchases more expensive, which will encourage Canadians to buy Canadian products and in turn help the domestic economy. Furthermore, a low Canadian dollar is also good for tourism, because Canada beco...