“Canadians feeling financial pinch, staying away from States” was the headline atop a recent newspaper story. Northern Minnesota retailers were lamenting a drop in business from Canadians because of “the abysmal exchange rate” between Canada and the United States, according to the report.
A one-sided perspective dominates the story: The Canadian dollar, now worth about 66 U.S. cents, is very weak. The story doesn’t address an equally truthful perspective: that the U.S. dollar, now costing about $1.52 Canadian, is very strong. Looking at it from this perspective gives different insights.
Did the Canadian dollar fall, or did the U.S. dollar rise? Remember that any currency has more exchange rates than just vis-à-vis the dollar. Compared to three important international currencies, the Canadian dollar has not weakened at all. It has strengthened considerably against the Japanese yen, the EU euro and the British pound over the last 18 months. It has declined in value slightly in comparison to the U.S. dollar.
A Canadian dollar buys 12 percent more pounds than in January 2000, 15 percent more yen and 17 percent more euros. If it has risen against these three currencies, while declining some 4 percent against the U.S. dollar, is it really weak? Or is the dollar strong?
As the article was written, the average reader would probably conclude that there is something wrong with the Canadian economy or its monetary policy. It offered no hint that factors within the U.S. economy led to an overvalued U.S. dollar, causing slow business for resorts in northern Minnesota and shopping malls in Grand Forks.
Ironically, stories the same week noted that manufacturing and agriculture are two of the weakest sectors in the U.S. economy but that consumer buying remains relatively strong. None of these articles pointed out the economically obvious: that an overvalued currency hurts most producers but effectively subsidizes consumers.
One can look at any exchange rate-related issue from two different perspectives. Did one currency get cheaper or did the other get more expensive? How one frames the question influences how one interprets the situation.
Confusion about exchange rates is not limited to reporters. The article also described how one Minnesota resort tries to attract Canadian customers by accepting Canadian currency one-for-one in payment of U.S. dollar-denominated room charges and how a nearby golf course offers a 40 percent discount to Canadians.
True, this brings in more customers, but so would offering a similar discount to “foreigners” from Wisconsin, Alabama or Florida. Why limit a discount to Canadians?
Following this reasoning, the resort might draw in Bulgarian tourists if it let them pay their room bill in levs at one to the dollar. This would result in a 57 percent discount in dollar terms. The golf course might let visiting Turks play 180 rounds of golf for a U.S. penny, since Turkey’s lira is now worth 99.999920694 percent less than a U.S. dollar.
Moreover, while the article in question looked at the alleged effects of the U.S./Canadian exchange rate on U.S. businesses and Canadian consumers, it ignored the mirror-image effects on Canadian businesses and U.S. consumers. If the U.S./Canadian exchange rate does not represent simple differences in price levels in the two countries, then the prevailing rate must be a boon to U.S. consumers who visit Canada and to Canadian businesses with U.S. customers.
Additionally, since the Canadian currency has strengthened relative to other currencies, the lack of Canadians in Duluth or Grand Forks may be because they have gone to London, Paris or Tokyo, where their dollars go much further than a year ago.
Even if some reporters and readers do not fully understand exchange rates yet, it is good that they are beginning to report the consequences.
Nor need they feel unduly abashed about their one-sided focus. I have been following Brazil’s economic troubles in recent weeks and have seen dozens of stories in that country’s press noting that the U.S. dollar has risen. This even occurs on days when the dollar drops in value relative to the yen, euro and pound. I have yet to see a story in Brazil’s newspapers that frames the phenomenon in more accurate terms, namely that the Brazilian real is falling. Implicitly blaming the other country seems a popular thing to do around the world.
© 2001 Edward Lotterman
Chanarambie Consulting, Inc.