It would be a "mistake" to peg the Canadian dollar to the U.S. dollar, according to the incoming Bank of Canada governor, Mark Carney.
Carney told a parliamentary committee Wednesday that it's not surprising there are calls to adopt a fixed exchange rate, given the loonie's recent volatility.
"In my opinion, it would be a mistake to do so," he told members of the House of Commons finance committee.
"It would mean that, de facto, Canada would adopt U.S. monetary policy, despite the reality that the structures of our economies are very different and, as a consequence, often require different types of adjustments in response to global developments," he said.
Carney said floating exchange rates make it easier to adjust to global economic forces.
"A floating exchange rate helps to smooth that process and to minimize the adjustments in other areas of the economy."
Canada has had a floating exchange rate since 1970. It was fixed from 1962 to 1970. Before that, the currency was allowed to float from 1950 to 1962.
Carney also underlined that market participants must know exactly what they're buying. The recent credit squeeze was due, in part, to the growing popularity of complex short-term debt products that bundled in loans from a variety of sources — the origin of which wasn't often clear to the purchasers.
To that end, he said "enhanced disclosure and transparency are crucial.
"Investors must understand the price dynamics and liquidity risks of the products they buy, rather than relying solely on credit-rating agencies," he said.
Carney becomes the governor of the Bank of Canada on Feb. 1, 2008, replacing David Dodge.
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