Canadian Currency Hits Four-Year High

Canada’s surging currency burst through the (U.S.) 80-cent mark in early trading on North American markets Thursday, reaching its highest level in more than four years.

The currency, flirting with the psychologically important level during busy trading Wednesday, finally topped the barrier early in the day and reached 80.08 U.S. cents--its highest level since Feb. 24, 1984--before falling back slightly at midday.

The Canadian dollar closed at 79.90 cents Wednesday.

“We’ve been watching it go up steadily, so personally I wasn’t surprised,” said one trader with a large foreign bank in Toronto.

The currency, dismissed as the Northern Peso when it hit a low of 69 U.S. cents just two years ago, has staged a strong recovery in recent months.

The country’s strong economy--which grew by 3.9% in 1987--as well as optimism about a proposed free trade deal with the United States, are considered the main reasons behind the rise.

However, analysts say the sharp rally over the past few weeks has been fueled by the central bank’s tight monetary policy. The Bank of Canada, concerned that the strong economy will ignite the inflation rate, has kept interest rates high, which in turn has attracted investment from abroad and buoyed demand for Canadian dollars on international markets.

But economists disagree on the long-term outlook for the currency. Some argue that once the Bank of Canada eases its grip on the money supply, the Canadian dollar will retreat back to about 76 U.S. cents.

“We’re sort of bearish on it in the long term,” said economist James Donegan at the Toronto investment firm of Midland Doherty Ltd.

Donegan says the economic fundamentals do not support such a high currency. He said the large deficit in Canada’s current account and the large federal budget deficit bode ill for the Canadian dollar’s prospects further down the road.

Ottawa has pledged only a marginal $400-million ($320 million U.S.) cut in the budget deficit that is estimated to total $28.9 billion in the fiscal year ending March 31, 1989.

But at the Canadian Imperial Bank of Commerce, economist John Clinkard said he is not looking for much of a retreat in the currency because outlook for the economy continues to be bullish.