Dodge May Raise Rates, Bucking Exporter, Union Pleas

Bank of Canada Governor David Dodge may raise interest rates for the first time since May 2006, as exporters and unions warn an increase will send the currency to parity with the U.S. dollar and cost jobs.

The central bank will lift the overnight rate by a quarter- point to 4.5 percent tomorrow, according to all but one of 29 economists surveyed by Bloomberg News. Speculation grew after the last decision May 29, when policy makers said a tightening might be needed ``in the near term,'' citing ``excess demand'' in the world's eighth-biggest economy.

``If they jack them up and say there's a risk they're going even higher, it's going to drive the Canadian dollar to be even stronger,'' said Steve Lancaster, chief financial officer at Toronto-based CCL Industries Inc., which sells half the aerosol cans and plastic bottles it makes in Canada to the U.S. ``That's going to be enough to push a lot of people over the edge.''

Dodge's critics range from bigger companies such as jet maker Bombardier Inc., to workers who've protested near the central bank's headquarters and provincial ministers who've pressured him in private and in the media. The 64-year-old offers little comfort, saying he can't focus on factories, while conceding some of the currency's rise may be due to market speculation rather than to the strong economy.

The Bank of Canada will announce the decision at 9 a.m. in Ottawa tomorrow.

Currency Rally

The Canadian dollar has climbed 45 percent in five years and may reach parity with its U.S. counterpart for the first time since 1976. It touched a 30-year-high of 95.74 U.S. cents today, continuing to squeeze the sales to the U.S. that make up 30 percent of Canada's gross domestic product.

The currency traded for 95.40 U.S. cents at 9:10 a.m. in Toronto, up from 95.28 U.S. cents on July 6.

Manufacturers, who export about half of what they produce, have lost 289,000 workers, or 11 percent of their workforce, since April 2004.

UPM-Kymmene Oyj, Europe's second-biggest papermaker, said last month that it's shutting down a New Brunswick mill, which employs 600 for as long as a year starting this August. The higher currency and lower paper prices made the mill unprofitable for the Helsinki-based company.

``The mill was acquired four or five years ago under completely different circumstances,'' UPM North America President Bernd Eikens said in a July 3 interview from Chicago. ``The Canadian dollar plays an important role, especially for a mill which sends almost all its products to the U.S.''

Record Bets

CIBC World Markets Inc. and HSBC Securities Canada Inc. predict things won't get any easier, saying the currency will match the U.S. dollar this year. Futures traders held a record number of bets on the dollar gaining against its U.S. counterpart, according to June 26 data from the Washington-based Commodity Futures Trading Commission.

The manufacturing-heavy provinces of Ontario and Quebec, the country's two most populous, are being strained by the currency.

Ontario Finance Minister Greg Sorbara said June 19 that even a 93-cent dollar ``has very severe consequences'' for his province, home to Canada's automobile industry. Sorbara said he met with Dodge in private that day to deliver the same message.

Pierre Beaudoin, executive vice president of Montreal-based Bombardier, which makes midsized jetliners, said June 19 at the Paris Air Show that the currency's strength is ``a very big challenge.''

The dollar has gained because of record global demand for Canadian commodities such as crude oil from the western province of Alberta's tar sands, and metals such as copper.

Home Prices, Jobs

That commodity boom is causing housing and labor shortages in the oil patch, sending home prices to records and pushing the national jobless rate to a three-decade low of 6.1 percent. The western provinces' sizzling economies have offset factory losses elsewhere, boosting inflation minus volatile items such as fuel to a four-year high of 2.5 percent in April.

The measure, which central bankers use to gauge future trends, slowed in May while remaining above their target.

``It's time to hammer inflation a bit and hike rates,'' said Sebastien Lavoie, a former Bank of Canada economist now at Laurentian Bank Securities in Montreal. ``The bank's goal is to target inflation at 2 percent; they don't target the dollar whatsoever.''

Dodge, who retires in January, warned in a speech last month of ``an increased risk of future inflation.'' Most economists also forecast rates will go up again on Sept. 5, according to the median of 18 estimates in a Bloomberg survey taken July 3.

Raising Union Ire

Still, Dodge said after the June 13 speech that the currency was gaining more quickly than past economic trends would suggest it should, a comment that raised the ire of Canadian Labour Congress President Ken Georgetti, 55.

Tightening now would drive the dollar to ``a destructive and unsustainable level'' and ``worsen the manufacturing jobs crisis,'' Georgetti told Dodge in a letter released June 28.

Georgetti, who represents 3.2 million unionized workers in a country of 32.8 million people, also forwarded his letter to Finance Minister Jim Flaherty, who later this year will approve Dodge's successor.

source:bloomberg.com