Reuters: US Dollar Report: UPDATE 1-Bank of Canada says strong commodities good for economy

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UPDATE 1-Bank of Canada says strong commodities good for economy Sep 7th 2012, 15:54 Fri Sep 7, 2012 11:54am EDT * Carney dismisses idea Canada suffering from Dutch Disease * Indicates will not act against C$ appreciation * Canadian dollar hits year high prior to speech * No explicit mention of outlook for interest rates By Scott Haggett CALGARY, Alberta, Sept 7 (Reuters) - Bank of Canada Governor Mark Carney on Friday said high commodity prices were unambiguously good for the economy and he made clear the central bank would not counter commodity-driven increases in the value of the Canadian dollar. In a speech in Calgary, Carney dismissed the idea that the economy was suffering from so-called Dutch disease, whereby high commodity prices increase the value of the currency and help hollow out the manufacturing sector. Canada is a leading exporter of crude oil and its currency has been persistently strong against the U.S. dollar. "Most fundamentally, higher commodity prices are unambiguously good for Canada," Carney said, predicting the sustained global demand for commodities would keep prices elevated. Carney said any moves by the central bank to curb commodity-driven movements in the value of the Canadian dollar would be futile in the long-term. Taking such steps would eventually lead to volatile inflation and employment and an estimated 1 percent cut in output over five years. "The logic of Dutch Disease requires that we undo our successes in order to depreciate our currency. Taken to its natural conclusion, this logic dictates that we shut down our oil sands, abandon our resource wealth, have high and variable inflation, run large fiscal deficits and diminish our financial sector. "Such actions would surely weaken the Canadian dollar, but they would also weaken Canada," he said. The Canadian dollar touched its strongest level in nearly a year on Friday after Canadian employment data showed the economy added a higher-than-expected 34,300 jobs in August. The currency firmed to C$0.9766 against the greenback, or C$1.0240, from C$0.9818, or $1.0185 just before the data was released. This was the strongest level since Sept. 19, 2011. Carney's comments contradicted those of Thomas Mulcair, the leader of the main opposition New Democratic Party, who argues Canada's rapidly increasing oil output from the Alberta tar sands is driving up the Canadian dollar and harming the manufacturing sector. Ontario Premier Dalton McGuinty, leader of Canada's most populous province and manufacturing heartland, has made similar comments. The Dutch Disease moniker is used to describe the decline of Holland's manufacturing sector as its currency rose after production from a large natural gas field hit full stride in the 1960s. Carney pointed out that the decline of manufacturing in Canada was part of a broad trend across the industrialized world. "Canada has not lost ground relative to other advanced economies," he said. Carney did not directly address the issue of monetary policy in his speech after the bank on Wednesday held its key interest rate unchanged at 1 percent. The Bank of Canada is expected to put off raising interest rates until the second quarter of 2013, according to an Aug 28 Reuters poll of financial institutions. Link this Share this Digg this Email Reprints

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