`Loonie' bin: the U.S. dollar may force the struggling Canadian `loonie' into extinction

0 Comments | Insight on the News, March 4, 2002 | by Mark Blanchard

America's war on terrorism may end up claiming an unintended victim -- the lowly Canadian loonie. As Washington and Ottawa forge closer ties to strengthen continental security, politicians are about to ask a question few would have dared before Sept. 11: Should Canada adopt the U.S. dollar?

The Canadian House of Commons' Foreign Affairs Committee has taken up the issue as it discusses integration with the North American economy. "September 11 will accelerate the process" says Sherry Cooper, a former Federal Reserve economist now working in Canada as executive vice president at the Bank of Montreal and its Chicago-based subsidiary, Harris Bank. "We're harmonizing our immigration rules, trade policies, border controls [and] even airline security now more than ever, so why not dollarize as well?"

The debate comes as Canada's currency -- dubbed the "loonie" because its one-dollar coins depict a graceful loon on a lake -- hit a new low in trading at the end of January, rebounding to 63 U.S. cents as of Feb. 4. Twenty-five years ago, the Canadian dollar was worth $1.03; a decade ago, it was worth 89 cents.

"The loonie doesn't float, it sinks," Cooper says. "The world is evolving three major trade markets and three major currencies. The Canadian dollar won't be one of them. The weakness in the currency is reflecting that." With the eventual phaseout of the British pound after London joins the European currency union, the world's leading currencies will be the U.S. dollar, the euro and the Japanese yen.

Although Cooper predicts the loonie will rise slightly by the end of this year, she hopes Canadians will adopt the dollar within five years "while we still have something to bargain with." But Prime Minister Jean Chretien doesn't think North America needs its own version of the euro. "The fundamentals of the Canadian economy are the best in the Western world at the moment" he says. "The Canadian dollar should be stronger according to the real value"

Canadian business leaders are clearly worried about the state of the loonie, however. A recent poll found more than half believe Canada should "definitely" or "probably" consider adopting the U.S. dollar. Some have called for a public debate on the beleaguered loonie's future but are careful not to offend Canadians' sense of sovereignty.

"My own view is that, eventually, Canada and its biggest trading partner will move to a common currency" Paul Tellier, the president and chief executive of the Canadian National Railway, said in a speech in January. "The integration of the North American economy is taking place faster than any of us expected"

MARK BLANCHARD WRITE FOR Insight's SISTER DAILY, THE WASHINGTON TIMES.