Two brokerage houses took differing views on the plunging U.S. dollar Wednesday. BMO Nesbitt Burns Inc. warns that “too much U.S. dollar weakness, too fast, is good for no one — not even the U.S.,” while RBC Financial Group sees hidden benefits to a stronger Canadian dollar.

The U.S. dollar sold off sharply Tuesday, a development BMO attributes to the rate announcement by the U.S. Federal Reserve. “Implicit in the Fed’s concern about deflation is tacit (if not explicit) support for a weaker U.S. dollar,” BMO chief economist Sherry Cooper said in her report. “Depreciation of the greenback puts upward pressure on import prices, increasing inflation generally and giving domestic businesses more pricing power. Also, the hint of a possibility of further rate cuts in the future also weakens the dollar.”

Cooper wars that “this is a dangerous business, however, given that the U.S. has an enormous current account deficit to fund, now at a record 5.25% of GDP. For the first time ever, the U.S. has a deficit in its investment income balance as well, meaning that Americans are sending more interest, dividends and profits to foreign investors than they receive themselves. A precipitous further decline in the U.S. dollar would be destabilizing and could lead to a marked reduction in net foreign capital inflows.”

The falling dollar also tightens monetary policy elsewhere, she says. “Already, Canada is feeling the pinch, as profits will weaken and exporters will find it more difficult to compete. Ditto for Europe where economic activity is already depressed.”

“But keep in mind, this is not about the Canadian dollar (or euro, or Aussie dollar) strength. It is about U.S. dollar weakness. The Canadian dollar is rising in an environment where virtually all other currencies are rising as well against the U.S. dollar. The fundamentals in Canada have not recently shifted to a more favorable stance. Arguably, they were even stronger last year when the relative GDP-growth gap and the interest-rate gap were even wider,” Cooper says.

RBC, in a report by assistant chief economist John Anania and economists Carl Gomez and Allan Seychuk, concedes that the recent rise of the Canadian dollar comes at a difficult time for Canadian exporters.

“However, focusing solely on exports is too narrow,” they say. “First, the Canadian dollar does not react in a vacuum; its gains are the result of Canada’s strong economy, impressive growth prospects and rising commodity prices – factors that benefit all Canadians. Consumers benefit from an appreciating currency through cheaper prices for imported goods and services and businesses through lower import costs.”

RBC predicts that the Canadian dollar will continue to reflect the U.S. dollar’s weakness but also draw support from some unique factors. “Rising interest rates, improving commodity prices, the net savings position of governments and the private sector and G7-leading economic growth will buttress the dollar as it ascends to US75¢ by the end of 2004.”

It says that a stronger dollar provides support for capital investment, since most capital equipment is imported. In turn, this should boost the productivity of Canadian businesses.

“As businesses come to rely on productivity growth to offset the Canadian dollar’s appreciation, the dollar will find additional support. A virtuous cycle could conceivably emerge whereby additional currency gains would push down relative costs of capital further, incite businesses to invest more, push up productivity and provide the Canadian dollar with another source of support. In the longer-term, such a virtuous cycle argues for an increase in Canada’s standard of living as the larger size and quality of the supply of productive factors relative to its population becomes greater.”

RBC predicts that capital-intensive natural resource industries like primary metals, oil and gas, chemicals and paper should be beneficiaries of this move.

“Alongside capital-intensive industries, industries in which the level of spending on investment goods may not be particularly high, but is high compared to industry value-added are also high in the ranking. For example, educational institutions’ annual spending on computers, technology and lab equipment is not as high as capital investment by other industries, but is high compared to education’s measurable value-added (mainly wages and salaries of instructors). Transportation and agriculture are similar: the cost of the equipment (vehicles, farm machinery, etc.) is high in relation to the value-added from the activity.”