The Myth of Dollar Parity

All the major media are bombarding us daily with stories about the approaching so-called parity between the Canadian and US dollar exchange rate. Now it's a horse race, with people even giving probabilities as to if and when this magical milestone will be achieved:

"Canada's dollar has a 68 per cent probability of reaching parity with the greenback by year-end, up from 61 per cent yesterday, according to implied volatility from options trading monitored by Bloomberg."

With some software help, I counted 10 occurrences of the word parity in the quoted article.

Why does this matter? I mean, aside from the perverse pride many Canadians feel -- due, it seems, to a silly need to give Americans some comeuppance -- when this meaningless arithmetic coincidence occurs, does it have any operational impact on us and our economy. Sure, it does matter to our economic health that there is exchange rate volatility and a shifting trade imbalance with the United States, but this one particular point on the exchange rate continuum. Most emphatically, no!

Let's say, for the sake of argument, that rather than being denominated in units we call dollars, the Canadian currency unit will change overnight to the drachma, at the rate of 2 drachmas to the old dollar. The numerical value of all prices, stock quotes, etc. will now be precisely twice what it was the day before. Further the exchange rate with the US dollar becomes 0.50d (where d is drachmas). The question, what has changed?

The answer is, apart from a loss of so-called parity, absolutely nothing. It should be clear from this that parity has no operational impact. About the only impact of parity is psychological: Canadians start feeling better about themselves. Now that's a ridiculous reason for anyone to focus on currency parity.

About the only practical benefit I get from parity is the easy comparison of prices, those north and south of the border, of the same product or commodity. That's it. I suspect the media is spending so much ink (or pixels) on this topic is that there are diminishing hopes for a federal election: the currency is apparently their second choice of a horse race to latch on to.