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Exchange rate

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The confusion about whether the Federal Reserve Board will continue to inject billions of dollars of liquidity into the nation’s financial markets carries a mixed message for Northern New York. Families and institutions whose income depends on savings accounts have suffered as their incomes fell dramatically since 2008. They see the comments by Federal Reserve Chairman Ben Bernanke that quantitative easing would wind down by next year as a signal that interest rates will rise, thus increasing income from their savings accounts. Not-for-profits that depend upon endowments largely invested in bonds are also cheering for higher interest rates.

Mr. Bernanke’s comments sent the value of an American dollar on an upward trajectory while the value of the currency of our neighbor Canada immediately fell. The Canadian dollar is now worth about 95 U.S. cents, down from as much as $1.02 earlier this year.

How does that affect Northern New York? A look at license plates in the parking lots of the St. Lawrence Centre, Massena, or Salmon Run Mall or Target in Watertown tell the story. Canadians flock to the United States to shop, attracted by American prices and the strength of their dollar.

Mr. Bernanke’s message resonated with Doug Porter, chief economist at BMO Capital Markets, who told the Toronto Star that the Canadian dollar will weaken even more by the end of the year, but he did not fear that the value of the currency would reach the all-time low of 62 cents in 2002.

Canadian economists are predicting that cross-border shopping will slow as the American dollar rises in value. They warn that savings from lower U.S. prices will disappear as the difference in the value of the two currencies widens. Mr. Porter suggested the cheaper Canadian dollar “might dim the appetite a little bit for some people to cross-border shop. The deals aren’t quite as big as they might have been, even a couple of months ago.”

Other economists predict Canadians will continue to shop for big-ticket items in the U.S. but that those who live close to the border and drive here to save money on products consumed daily in households will not make a shopping trip here. Purchases of bigger ticket items and airplane tickets will not likely be impacted since the price differential is substantial enough to exceed the lower currency exchange rate.

The change in shopping behavior will challenge merchants in the north country and Jefferson and St. Lawrence counties’ governments, which reap substantial sales tax revenues from Canadian shoppers. In fact, one of the justifications of raising the local sales tax 33 percent in St. Lawrence County was to increase revenue from Canadian shoppers.

However, as American interest rates rise, the negative pressure on border retailers will grow and sales tax revenues stagnate, leaving St. Lawrence County’s bountiful projections of a sales tax bonanza a hope, not a fact. But at least Northern New Yorkers will earn more money from their savings accounts and will have additional money to pay the higher sales tax.

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