(Bloomberg) --
The Canadian economy's underperformancerelative to the U.S. of late has put downward pressure on thecountry's currency, but that should help the economy through atemporary slowdown, a Bank of Canada official said.
In a speech on how Canada manages its foreign exchangereserves, Deputy Governor Tim Lane touted the benefits of thecountry's floating exchange rate policy that has allowed it toquickly adjust to shocks and keep reserves at low levels.
Lane made a few observations about the “recentexperience” of the Canadian dollar, which has weakened againstthe U.S. dollar because of the relative performance of the twoeconomies.
“To a certain extent, movements in the Canadian dollarreflect the comparative strengths of the Canadian and U.S.economies -- which are linked, in turn, to expectations for eachcountry's monetary policy path,” Lane said, according toprepared remarks he will deliver Wednesday at the PetersonInstitute for International Economics in Washington.
The U.S. economy has been benefiting from fiscal stimulus,prompting the Federal Reserve to bring rates higher, Lane said.In Canada, U.S. trade policies have been holding back businessinvestment below levels that would be expected given economicfundamentals. The country is also facing lower oil prices, andsofter housing investment and consumption that has resulted in a“temporary” slowing of growth.
“This combination of factors has been putting downwardpressure on the Canadian dollar,” Lane said. “The lowerCanadian dollar, in turn, will help support the economy throughthis period.”
Lane's speech went over the history of Canada's reservemanagement practices, pointing out the country hasn't intervenedto stabilize the Canadian dollar in over two decades, eventhough the option is always there if necessary.
“Canada holds foreign exchange reserves as a precautionagainst extreme events,” Lane said. “Even though Canada hashad no history of such events, we know from internationalexperience that they are possible.
Canada's current level of reserves are about $85 billion,or about 5 percent of GDP. That's below what most othercountries hold, Lane said.
Lane also said the Bank of Canada monitors closely the risesince the global financial crisis of Canadian-dollar assets as areserve currency, since they could have implications for boththe value of the Canadian dollar and government bond markets.
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