Dec. 23 (Bloomberg) -- Canada’s Finance Minister Jim Flaherty said China, with the world’s largest currency reserves of $2.3 trillion, may be poised to buy Canadian dollars as it seeks to shield its reserves against the U.S. dollar’s decline.
“It does not surprise me that China and Russia would take greater positions in the Canadian dollar than they have previously,” Flaherty, 59, said during an interview in his office in Ottawa. “I would expect countries looking around the world to invest in market currencies that are reliable.”
The U.S. dollar has declined against all but one of the 16 most-active currencies this year, prompting major reserve- holding countries such as Russia and China to express concern about their U.S.-denominated investments. Russia last month said it will add Canadian dollars to its reserves to lower its dependence on the U.S. currency.
The Bank of Canada has warned “persistent strength” in the currency is a main risk for the economy, potentially acting as a “significant” drag on growth. Canada’s currency has gained 15 percent this year against the U.S. dollar. Chinese purchases of Canadian dollars would also cement growing economic links between the U.S.’s two largest trading partners.
Chinese Premier Wen Jiabao said in March that the nation was “worried” about the safety of its investment in U.S. debt, as a weakening dollar eroded the value of its reserves. China’s currency regulator said earlier this month it will “improve” its utilization of foreign-exchange reserves.
PetroChina Co., China’s largest oil company, this year bought its first stake in the Canadian oil sands, paying C$1.9 billion ($1.8 billion) for 60 percent of a project run by Athabasca Oil Sands Corp. Vancouver-based Teck Resources Ltd., Canada’s biggest base-metals producer, sold a 17 percent stake to China’s sovereign wealth fund for C$1.74 billion in July.
Prime Minister Stephen Harper, seeking to cut dependence on the U.S., traveled to China earlier this month to secure Asia’s second-biggest economy as a customer for oil, natural gas, uranium and other commodities.
“We know that China has been interested in things in Canada, whether it’s the bond market or the oil sands or oil companies,” said David Watt, senior currency strategist in Toronto at RBC Capital Markets, a unit of Canada’s biggest bank. “They’ve been sniffing around in the past. We know they’ve been interested.”
Watt said an amount equal to 2 percent of Asian reserves would mean about C$100 billion of currency flows into Canada.
“It would certainly be a positive backdrop for the currency,” Watt said.
Move to Parity
The Canadian currency gained 0.9 percent to C$1.0484 per U.S. dollar at 3:07 p.m. in Toronto, from C$1.0575 yesterday. One Canadian dollar purchases 95.38 U.S. cents.
Canada’s currency will appreciate to parity with the U.S. dollar by the middle of next year, Bank of Nova Scotia predicts. The median estimate of 38 analysts surveyed by Bloomberg News is for the currency to strengthen to C$1.04 in that period. The currency last traded on a one-for-one basis in July 2008.
Asked whether the Canadian dollar’s gain was a concern, Flaherty said the government is worried about “sudden” moves that don’t give companies “sufficient time to adjust.”
Canada’s currency has gained in part as investors bet an accelerating economic recovery will prompt the central bank to raise interest rates sooner than in the U.S. Canada also sits on the largest pool of oil reserves outside the Middle East and is a major exporter of other commodities such as gold. A Canadian commodity price index compiled by the Bank of Canada has advanced more than 20 percent this year.
Canada also has the lowest debt levels among the Group of Seven nations, making its currency a relatively safer investment, Flaherty said in the interview on Monday.
“It’s been clear for some time now that the downward pressure on the U.S. dollar is significant and that results in the other reliable market currencies having some upward pressure,” Flaherty said from his 21st-floor office that looks out to the hills of Gatineau Park. “I see it as a reflection of the relative strength of the Canadian dollar and the relative strength of our fiscal situation.”
Flaherty said China might relieve pressure on Canada’s dollar if the Asian country did more to loosen restrictions on movements of its currency.
Global “imbalances” will be a “primary subject” of discussion at a meeting of Group of Seven officials in February, he said. Canada will host a meeting of finance ministers and central bankers from the group on Feb. 5-6 in Iqaluit, a northern town near the Arctic Circle.
Lawmakers around the world are redesigning their financial architecture in the wake of the worst financial crisis in a generation that forced governments to spend more than $500 billion in the past year bailing out banks.
Officials will discuss “mutual assessment systems” to ensure the G-7 countries can be “checking on each other,” and developing so-called macro-prudential regulations that focus on risks to the financial system instead of a single financial institution, Flaherty said.