Spending power across Canadian border grows

Brian J. O'Connor
Detroit News Finance Editor

The good news is, nearly six years after the end of the Great Recession, the U.S. dollar is the strongest major currency in the world.

The bad news is, nearly six years after the end of the Great Recession, the U.S. dollar is the strongest major currency in the world.

Where you stand on the matter mostly comes down to what you do with your money.

If you're a Metro Detroit consumer, it's good news. You can cross the river to Windsor and get an automatic 20 percent discount on anything you buy. Imported goods from Europe and Japan are cheaper than a few years ago, and now's the perfect time to score a discounted vacation to France, Italy or Cyprus.

And if you're a Canadian working on this side of the border, such as Susan Dalley, it's really good news — except for taxes.

"We had a couple of guys here saying, 'You just got a raise,' but you have to consider the taxes," said Dalley, who does accounting work for Gala and Associates in Beverly Hills. Besides taxes, she notes, prices are higher in Windsor, the cost of living is more expensive and she has to pay daily tolls to cross the river.

Still, she said, "I do stick some money away because the U.S. dollar is so favorable."

If you're a business owner, you could be looking at the downside of a stronger dollar. Anything made and sold here at home is going to cost you more to produce than it costs your foreign competitors, making made-in-the-USA products more expensive than imported goods.

And any goods you export to overseas can suffer a double whammy: Not only are they more expensive to make here, but you'll need to charge even more over there to make a profit in euros or yen, since any money you bring back from overseas loses value when you deposit it at home.

"If you look at it since last July, it's up 13 percent, and that's significant," said Tu Packard, senior economist at Moody's Analytics. "Against the euro, it's up 27 percent, and that's really significant."

One U.S. dollar buys 0.87 euros. A year ago, a dollar got you just 0.73 euros. In Japan, the greenback is worth 120 yen now, but 12 months ago traded at 102 yen. And across the river in Windsor, the dollar has gone from 1.09 Canadian dollars last year to 1.20 loonies today.

But the dollar isn't trading at any historical high, just a bit more than it has, on average, over the last 40 years. "If you take the long view, since the '70s, where it now is maybe slightly stronger than the long-run average," Packard noted.

That means it's not a turbo-charged U.S. currency that's boosting the dollar's value, but the continued lousy economies of many of our major trading partners, despite claims by Detroit's automakers that Japan, in particular, manipulates currency rates to give its cars an unfair price advantage in this country.

Instead, the weaker yen is caused by Japan's central bank pushing interest rates down to zero, just as the U.S. did during the financial crisis. That pushes Japanese investors to find better-yielding investments abroad, which further drives down the yen. The same trend applies in Europe, where the European Central Bank has driven some interest rates to less than zero to combat the region's continued teetering on the brink of dangerous economic deflation.

"Japan has been going through deflation for several decades," Packard said. "It's not a policy designed to weaken the yen as much as it's a policy designed to fight deflation. The government isn't deliberately trying to weaken the yen, but it's good news for Toyota and the other Japanese firms."

One exception is China, where state-managed economic policies — including exchange rates — have kept the Chinese yuan at a nearly constant value with the U.S. dollar since 2012, despite concerns about China's economy slowing down.

The yuan was drastically undervalued vs. the U.S. dollar for more than a decade, beginning in the 1990s, but steadily rose against the dollar starting in 2005, and is now on the brink of being declared fairly valued by the International Monetary Fund.

"The yuan has not weakened that much against the dollar," Packard said. "This is an issue that the United Nations is very sensitive about."

When it comes to Canada, however, the currency equation takes in all of North America, notes Robert Dye, chief economist for Comerica Bank. The Canadian dollar and Mexican peso have stayed on a relatively equal basis as the U.S. dollar has strengthened against both of them. U.S. automakers also have consolidated and shifted production since the industrywide restructuring so that, while it's now more difficult to ramp up production in Canada, where the exchange rate makes it cheaper to build cars, automakers can shift work to Mexico and still gain a currency advantage.

"Even though the dollar is pricey relative to Canada, we might not expect business to shift back to Canada because Mexico remains as another alternative," Dye said.

Canadian businesses recall the heyday of Americans shopping in Windsor in past decades, when the Canadian dollar was discounted to about 65 cents. The 20 percent break hasn't driven a lot of traffic over the river yet, but it is starting to pick up, said Dan Orman, co-owner of Freed's, Canada's largest independent clothier.

"We are starting to see some Americans trickle over, but we're not pursuing that business yet," Orman said. "Even at 20 cents or 22 cents it is a tremendous incentive for the consumer to come over here."

In addition, U.S. residents avoid taxes and, if they're in the country fewer than 48 hours, can bring back $200 worth of goods without paying any duty.

The biggest immediate effect, Orman added, is that the devalued Canadian currency pushes Windsorites to do their shopping, drinking and dining on that side of the river, instead of heading into Detroit.

Pamela Coon-Nast, a Wyandotte resident, recently picked out new furniture at Coulter's Furniture, also in Windsor.

"I was excited about the exchange rate," Coon-Nast said. "They have beautiful furniture and the prices are great. I've shopped there before, so for me it was a bonus."

But it isn't just Canada that makes for bargain-hunting. This is the best time in recent years to book overseas travel, too, added Packard.

"Who wins? My son wins," she said. "He's marrying a Cypriot and they're celebrating their wedding in Cyprus this summer. He's very excited because he's 25 percent under budget. For travelers, it's great. Everything is going to cost 35 percent less for us in Europe."


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Bucking up

The U.S. dollar has gained against the currencies of most major trading partners in the past year.

Currency/Friday/Year ago

■Canadian Dollar…1.20…1.09


■Japanese Yen…119.34…101.43

■Chinese Yuan…6.21…6.23

Source: X-rates.com