Canadian Dollar Slides Following Surprise Bank of Canada Interest Rate Cut
Tuesday July 15, 2003
I must admit, I didn't see this interest rate drop coming at all. Most economists, myself included, thought the Bank of Canada would not announce a rate cut although we knew the Bank would make an annoucement today. The Canadian Dollar has fallen almost a cent today against the U.S. Dollar after the quarter of a percent interest rate cut. The Canadian Dollar is currently trading at 71.79 US according to the CBC News. This may be a part of a series of events which has a significant impact on the American economy.
Since the United States began slashing interest rates a few months ago, the U.S. Dollar has gone down in value as the interest rate gap between the U.S. and its major trading partners has widened. The Canadian overnight rate is now at 3 percent while the U.S. Federal Funds rate is at 1 percent. In a related story, The San Jose Mercury News reports that Alan Greenspan is willing to keep this rate low for years if necessary to avoid deflation and stimulate U.S. economic growth. It's likely that other countries, such as Canada, will continue to further lower their interest rates, shrinking the interest rate gap. If this happens, the U.S. Dollar will appreciate against these currencies which would reduce American competitiveness on export markets and slow the economic recovery.
Important Links
Since the United States began slashing interest rates a few months ago, the U.S. Dollar has gone down in value as the interest rate gap between the U.S. and its major trading partners has widened. The Canadian overnight rate is now at 3 percent while the U.S. Federal Funds rate is at 1 percent. In a related story, The San Jose Mercury News reports that Alan Greenspan is willing to keep this rate low for years if necessary to avoid deflation and stimulate U.S. economic growth. It's likely that other countries, such as Canada, will continue to further lower their interest rates, shrinking the interest rate gap. If this happens, the U.S. Dollar will appreciate against these currencies which would reduce American competitiveness on export markets and slow the economic recovery.
Important Links
- To learn more about how central bank reactions to inflation and deflation influence interest rates see "What is deflation".
- To learn about the link between exchange rates and interest rates see my "Guide to Exchange Rates".
- You may also want to see "The Canadian Exchange Rate" which details the performance of the Canadian Dollar during the first half of 2003.
Comments
Since the United States began slashing interest rates a few months ago, the U.S. Dollar has gone down in value as the interest rate gap between the U.S.
but could u wxplain me how
thank you
roopa dharnish