Economy

US Dollar About to Slide

By Ryan McGreal
Published May 04, 2006

The US dollar has been slipping against other major currencies since at least 2000, but in the wake of last year's $800 billion current accounts deficit, analysts are now predicting a major, sustained decline.

The current accounts deficit is the difference between the value of a country's imports and the value of its exports. Last year, America imported close to a trillion dollars worth of goods and services more than it exported.

If any other country did this, its currency would simply devalue until its residents could no longer afford to import so much more than it exported. However, because the US dollar holds a position as the world's reserve currency and the exclusive trading medium for oil sales, foreign demand for dollars has actually increased even as America's economic foundation has grown more unstable.

This cannot continue forever. Until now, the greenback's history of stability and the high yields of its treasury certificates have kept foreign investors interested. That goodwill has finally run out.

This will have interesting repercussions for Canada. The Canadian dollar is currently trading around 90 cents US, the highest exchange rate since 1978. Some analysts are predicting parity before the end of the year.

This will hurt Canadian exports to the US, Canada's main trading partner, but so far, this has been more than offset by huge growth in Canadian revenue from oil, gold, nickel, and zinc, all of which are trading at historically high prices right now.

Unfortunately, that means more pressure for Canada to continue fulfilling its traditional role as "hewer of wood and drawer of water" rather than developing a higher value-add industry, which is more susceptible to the high exchange.

Ryan McGreal, the editor of Raise the Hammer, lives in Hamilton with his family and works as a programmer, writer and consultant. Ryan volunteers with Hamilton Light Rail, a citizen group dedicated to bringing light rail transit to Hamilton. Ryan writes a city affairs column in Hamilton Magazine, and several of his articles have been published in the Hamilton Spectator. He also maintains a personal website and has been known to post passing thoughts on Twitter @RyanMcGreal. Recently, he took the plunge and finally joined Facebook.

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