Canadian finance chief's luxury problem

In a world of monster fiscal deficits, Canadian Finance Minister Jim Flaherty has a luxury problem: The strong economy is pushing up his currency.

And even that doesn't really worry him.

In Flaherty's mind, it's a different world from the heady days of 2007, when the Canadian dollar zoomed up to a modern-day high near US$1.10. Then, speculators were behind the move, he said. This time, he credits the strong economy.

There's more demand for Canadian investments. So the upward pressure on the dollar to me makes sense, Flaherty told Reuters in his Parliament Hill office. It would have to go significantly above parity. And that would be a concern for Canadian business, and therefore a concern of mine.

Flaherty, already the eminence grise among the fast-changing cast of finance ministers of the Group of Seven big economies, is also focused on prodding China and other Asian economies to let their currencies rise -- a perennial discussion point at finance minister meetings.

We feel that there's room to move ... more flexibility in the Asian currencies, said Flaherty, who treated his G7 colleagues to a dog sled ride and meal of seal meat at a February conference in Canada's Far North. We'll continue to press on the subject.

Flaherty's Asia focus ties in with Canada's drive to stimulate trade with emerging markets, particularly resource-hungry China.

We know that the world trade picture is changing. You can see it in the countries that sit around the table at the G20 summits, Flaherty said, his voice almost drowned out by the stand-alone air-conditioning unit cooling his office in the Gothic revival building.

The share of Canada's exports going to the United States has steadily declined in the past decade but still stands at three-quarters. Flaherty could see it go down to as low as 60 percent in the next five to 10 years on more Asia business and a possible free trade deal with the European Union.

All the same, the state of the U.S. economy is always front of mind. And Flaherty, who mostly uses job figures and consumer confidence to gauge economic conditions, is pretty upbeat.

My two significant worries about the American economy are the relative weakness of the job recovery ... and weak U.S. consumer confidence, he said, adding the risk of the U.S. economy sliding back into recession is modest

The more likely course is a modest gradual recovery, said Flaherty, who studied at Princeton University in New Jersey before getting his law degree in Canada.

Flaherty's take on the Canadian dollar was echoed by Eric Lascelles, chief Canada macro strategist at TD Securities.

It's certainly not (that) the Canadian dollar has a free pass to soar for the skies, but it's simply a reflection of a reality, Lascelles said. There was a period a year ago when there was a great deal of hand-wringing over Canadian dollar strength and that really has abated as Canada has emerged as one of the stronger economies in the world.

DECISON TIME

It's a long way from what Flaherty describes as the hairiest moment in the financial crisis: A fateful October 10, 2008, meeting of G7 ministers in Washington when the financial world seemed close to collapse.

That meeting was unique because we tore up the communique. There were some very direct conversations about why Lehman Brothers had been allowed to fail, some recriminations by some of the Europeans against the United States, Flaherty said.

So if I had to pick a time that was the most intense and most worrisome, that was it.

Flaherty, a former personal injury lawyer of Irish-Canadian descent, had to make tough calls like purchasing insured mortgages. His big takeaway: Act quickly and boldly when crisis hits.

Framed by a painting of Thomas D'Arcy McGee, an Irish nationalist and one of the so-called fathers of the Canadian Confederation, Flaherty credits his law background and litigation experience for the ability to thoroughly analyze a problem and quickly getting to the point.

Flash forward two years, and the track is good for cutting Canada's budget deficit, Flaherty said. Private-sector forecasts used for the budget have growth at 3.5 percent this year, up from 2.6 percent when it was released in March.

But to Flaherty, it's premature to say the deficit will come in below his C$49.2 billion ($48.2 billion) forecast.

One issue clouding the picture: how to account for payments to provinces adopting the harmonized sales tax, or HST. Number crunchers are now figuring out whether to take the hit in one go or spread it out over several years, Flaherty said, adding: We don't have fun with figures here.

Budget time is tricky, especially for Canada's minority Conservative government. History shows minority governments have an average life span of around two-and-a-half years and typically fell over a budget vote, Flaherty noted.

Flaherty stayed clear of predicting when the current government will face a new election as one Thursday poll showed support for the Conservatives at the weakest since 2006.

Flaherty, 60 and father of college-aged triplet boys, says he is far from done. There's the budget deficit. And then there are overseas matters like hammering out a global bank regulation deal before the next Group of 20 summit in Seoul.

The key issue is how banks should define their capital, Flaherty said. Can they count residential mortgages? How about equity stakes like TD Bank's