U.S. dollar will weaken even more, says CIBC economist

(September 22, 2003) The U.S. dollar may be overvalued, but today’s volatility in the currency markets should be short-lived, says CIBC senior economist Avery Shenfield.

“In the long-term, the U.S. dollar probably has to weaken even further to get the U.S. out of a rut of a trade deficit and current account deficit,” he says. “But this might not be the time for other countries, like Japan, to weather the impact of stronger currency.”

The currency markets were rocked overnight, after a weekend meeting of G-7 finance ministers. At the meeting, the group called on Asian economies to allow their currencies to float more freely, with less intervention.

The comments were mostly aimed at China, which has been keeping the yuan artificially low to protect its domestic markets from imports and maintain its trade edge, much to the chagrin of the U.S. and European Union. But China is not the only country protecting its export industry.

Leading up to the meeting, Japan had been selling yen and buying U.S. assets to keep the yen weak. Shenfield says the markets would have taken the yen higher against the U.S. dollar over the last year if the Bank of Japan had not been holding it down.

Eventually, Shenfield says, the U.S. dollar will drop. But in a report released on Friday, he pointed out that in the currency markets “eventually” can mean years. He says the big move in the U.S. dollar will not come until Japan is in a strong enough position to withstand the pressures.

Shenfield says that the Bank of Canada will likely reduce interest rates, but that such a move could be a few months away. Many economists have been calling for a tightening of the gap between the Fed funds rate and the Bank of Canada’s overnight rate, blaming this disparity for the high dollar.

What do you think? Is the U.S. dollar overvalued, given the state of its economy? Or would such a “correction” devastate the Canadian economy? Share your thoughts about this topic in the Talvest Town Hall on Advisor.ca.

Filed by Steven Lamb, Advisor.ca, slamb@advisor.ca