Bank of Canada sits on $33.5-billion U.S. war chest : LUSENET : Grassroots Information Coordination Center (GICC) : One Thread

Bank sits on dollar-defence fund

$33.5-billion U.S. war chest left untapped as currency's value plummets Eric Beauchesne The Ottawa Citizen

The Bank of Canada is sitting on a record $33.5 billion U.S. in its dollar-defence fund of foreign currencies and gold but has refused to use any of it.

Finance Department figures released yesterday reveal the central bank has nearly double the amount it had to protect the currency when it was last this low during the Asian crisis three years ago.

"It's quite a substantial fund," said currency market analyst Rob Palombi at Standard and Poor's MMS International.

But the bank, which controls the fund, has not dipped into it because it doesn't see the current weakness in the dollar as a crisis, Mr. Palombi said.

Nor does the government.

Prime Minister Jean Chretien, under attack in the Commons yesterday for what the Canadian Alliance charges is a low-dollar policy, said the "problem" is not that the Canadian dollar is too weak, but that the U.S. dollar is too strong.

When Alliance finance critic Jason Kenney referred to the decline of the "loonie" on financial markets in the House of Commons yesterday, Mr. Chretien replied with irritation:

"There's a loony on the other side (of the House)."

In Toronto, Finance Minister Paul Martin said Western Hemisphere finance ministers have agreed to "stay the course."

The ministers agreed to stick with policies to reduce interest rates and taxes to deal with the current economic uncertainty that has pushed up the U.S. dollar against virtually every other currency.

Mr. Martin and Mr. Chretien also have repeatedly pointed out that the Canadian dollar has fallen less against the U.S. dollar than most other currencies.

Further, Mr. Palombi said that "most market participants believe we have quite a sizable war chest to defend the currency if we need to, which is positive for the currency."

The dollar posted a modest recovery following the release of the figures showing that Canada's official international reserves rose by $602 million U.S. last month to an all-time high of $33.513 billion U.S. The dollar closed at 63.59 cents U.S., up a little more than a quarter cent from 63.32 cents U.S. Tuesday, which was 1/100th of cent above the record low close of 63.31 cents during the Asian crisis.

"The U.S. dollar has been way overdue for a correction, and that's what we're finally getting," said Steve Demers, director of foreign exchange at National Bank.

Traders said the volatility has confused their clients as to the short- to medium-term outlook.

Mr. Demers maintains that the Canadian dollar will likely retest its record low within the next few weeks once the current bounce has ended.

Mr. Palombi said the small gain in the dollar had more to do with a shift in funds into the bond market from equities, which sparked some overseas buying interest in the currency.

In the past, the Bank of Canada would have used the reserve fund to buy Canadian dollars in foreign exchange markets when it wanted to temporarily bolster the currency without raising interest rates.

But since the 1998 Asian crisis, when it last used the fund to head off what it feared was becoming a run on the currency, it has adopted a policy of not intervening in foreign-exchange markets unless there's a crisis, Mr. Palombi noted. During the Asian crisis, the bank also used higher interest rates to defend the dollar.

Part of the dollar's weakness is blamed on the Bank of Canada's insistence in recent years on keeping Canadian interest rates lower than U.S. rates.

However, with the economy weakening and in need of lower rates, higher rates are not an option.

They would be counterproductive now, said CIBC World Markets economist Avery Shenfeld. "Of late, currency defence has been turned on its head," he said in an analysis this week.

The U.S. has been the most aggressive rate cutter and its currency has been rising, not falling, while the European Central Bank, the only major central bank to have refused to cut rates, has seen the euro fall.

The reason, Mr. Shenfeld said, is that investors now fear that higher rates will hurt a currency more than help it because of the damage they would inflict on already slowing economies.|ss=;

-- Martin Thompson (, April 05, 2001

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