Canadian Central Banker Warns of ‘Death Grip’ on U.S. Dollar

Tuesday, December 14, 2010
By Paul Martin

By Nirmala Menon

Canada’s central bank governor, Mark Carney, warned that the “death grip” on the U.S. dollar is “reducing the prospects for rebalancing global demand.”
In the text of a speech Monday to the Economic Club of Canada in Toronto, Carney said the international monetary system is “sliding towards a massive dollar block.” He noted that over a dozen countries are accumulating reserves at double-digit annual rates, and countries representing more than 40% of the U.S. dollar trade weight are now managing their currencies.
But, he said, excessive reserve accumulation will prove futile. He said structural changes in the global economy will “yield important adjustments in real exchange rates.”

Carney said many emerging economies are approaching limits to non-inflationary growth and the challenges of shadowing U.S. policy are increasing. Without changes in nominal exchange rates, he said the adjustment will come through inflation in emerging economies and disinflation in major economies.

“This more wrenching adjustment has already begun, raising the risk of debt deflation and deficient global demand,” Carney said. “At a minimum, this dynamic reinforces the low-interest-rate strategies of major advanced economies and may necessitate further rounds of quantitative easing.”

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