Cana­dian cen­tral banker, Mark Carney's con­cerns about the strong Loonie are well known. It threat­ens Canada's eco­nomic recov­ery. Some cur­rency ana­lysts believe the Cana­dian dol­lar could test its $1.10 highs again. But what is Car­ney doing about it?

David Rosen­berg says we should embrace this period in Canada's eco­nomic his­tory. "For its part, the Bank of Canada has said that “per­sis­tent strength in the Cana­dian dol­lar” is going to “slow growth and sub­due infla­tion pres­sures.” So, in return for softer growth, what we get back is lower “infla­tion pres­sures.” The win­ner here is any­one who needs to bor­row money – a strong loonie will pre­vent the Band of Canada from tak­ing the interest-rate punch­bowl away any time soon."

But, last week, the Bank of Canada inter­rupted the Cana­dian dollar's ascent when it left rates at 0.25%, and down­graded eco­nomic growth prospects for 2010 and 2011. The dol­lar lost 2 cents. There is pres­sure though for the BoC to ease further.

Carney's wait-and-see stance on quan­ti­ta­tive inter­ven­tion, indi­cates he may not have to. Instead, he may be talk­ing through this, while wait­ing for the G20 to sort out the US dol­lar; in effect, a pol­icy of benign neglect.

At the G-20 meet­ing in Pitts­burgh in late Sep­tem­ber, lead­ers made com­mit­ments to pur­sue poli­cies to bring the world into greater eco­nomic bal­ance. Fol­low­ing that meet­ing, the ECB's Trichet said it is "extremely impor­tant" that U.S. author­i­ties pur­sue poli­cies sup­port­ing a strong dol­lar, and that exces­sive foreign-exchange volatil­ity is an "enemy."

There's another G20 meet­ing sched­uled for Nov. 6–7 in Scot­land, and it's most likely to serve as a forum where all con­cerns over the dollar's weak­ness will be aired. "I think there will be fire­works at the G20," said Stephen Jen, a well-respected cur­ren­cies investor at hedge fund Blue­Gold Cap­i­tal Man­age­ment in London.

The US is wal­low­ing in the advan­tage of a weaker dol­lar. Neil Mel­lor, Bank of New York cur­rency ana­lyst, says, "You can't con­tinue down this road with­out some­thing giv­ing way, and it's clear that the U.S. is not going to do any­thing to put meat on the bones of its strong-dollar policy."

US$450-billion has been sucked from money mar­ket funds (the dol­lar) into risky assets since March. Zero-percent-interest-rate pol­icy (ZIRP) crowded investors out of the money mar­ket and into risky assets. In the sim­plest of terms, the global equity mar­kets' sling­shot recov­ery has led to con­versely rapid deval­u­a­tion of the dollar.

Now, a "strong US dol­lar pol­icy," for which there is great polit­i­cal will glob­ally, appears to hinge upon a rever­sal of for­tune in mar­kets or con­certed mon­e­tary inter­ven­tion via the IMF, or both.

There­fore, the price of relief from the Loonie's climb could be a syn­chro­nized decline in com­mod­ity prices and equity mar­kets, in the near term. The repa­tri­a­tion of cash to US money mar­kets means a stronger US dol­lar, and thus a weaker Cana­dian dol­lar, hence the syn­chro­niza­tion with the rever­sal in equity mar­kets and com­modi­ties prices. Per­haps Car­ney is right to let the big play­ers sort out and tighten the US Dollar.

In newer devel­op­ments ear­lier this week, the US gov­ern­ment, per­haps under some pres­sure, showed signs that it is will­ing to with­draw stim­u­lus, thus tight­en­ing the Green­back, by clos­ing down the hous­ing tax credit, and call­ing on Bank of Amer­ica to repay its bailout by sell­ing shares. The mar­ket is react­ing poorly.

It begs the ques­tion — Is the tail wag­ging the dog?

If the stim­u­lus and zero inter­est rate pol­icy is respon­si­ble for the mar­kets' huge recov­ery, then what effect will indi­ca­tions now, of the US government's will­ing­ness to with­draw stim­u­lus, have?

Either way, it would be pru­dent, at this point, to take the polit­i­cal pres­sure from the world's other large economies to re-establish bal­ance with­out jeop­ar­diz­ing their own recov­er­ies, seriously.

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