Argument: The Canadian economy is not trending toward dollarization

Issue Report: Dollarization


  • “Dollarization? Not here”. National Post. May 17, 2002 – “Although the evidence that we report is admittedly fragmentary, existing data suggest that informal dollarization is proceeding at a very slow (to non-existent) pace. Indeed, by many measures, Canada is less dollarized now than it was 20 years ago, and bears little resemblance to those economies that are typically regarded as truly dollarized. Some Canadian companies maintain their financial statements in both Canadian and U.S. dollars, and roughly 9% of the deposits held at Canadian banks are now denominated in U.S. dollars. Canadians also appear to be holding an increasing proportion of their financial wealth in U.S. dollar assets. It would be a mistake to interpret this as evidence of dollarization, however, in the sense that domestic economic activity is being conducted increasingly in U.S. dollars. The assets that Canadians hold in foreign currencies are used, for the most part, to support business activities abroad and to achieve a more efficient allocation of wealth. Globalization and diversification, in other words, should not be confused with dollarization.
While globalization may eventually push us to a point where the benefits of operating under a common currency outweigh the advantages of a separate national currency, this ‘tipping point’ does not appear to be imminent. Some observers would like to believe that the end is near, but the changes we have witnessed so far are less revolutionary than these visionaries suggest. To paraphrase from Samuel Clemens: Reports of the impending death of the Canadian dollar are greatly exaggerated.”
[…]Relative to many other industrial economies, we are remarkably “undollarized.” Despite the close proximity of the U.S. economy and the evident importance of U.S. exports and imports to the Canadian economy, very little informal dollarization has taken place. The significance of the U.S. dollar as a medium of exchange and store of value is often greater in countries like Japan and the United Kingdom, than it is in Canada.
Most goods and services in our country are priced exclusively in Canadian dollars, unless they are destined for the U.S. market or involve the sale of a primary product. The same is true for the preparation of corporate financial statements, unless the company is a large multinational and conducts most of its business outside Canada. Firms with inter-listed shares are often required to use the U.S. dollar for reporting purposes, but the relative importance of Canadian firms with stock listed on the NYSE and other U.S. exchanges has actually been declining over time — both compared to other foreign firms and as a share of the firms listed on the TSE. In short, the U.S. dollar is seldom used as a unit of account for domestic transactions.”