In the closest he has come to publicly stating what he sees as the true worth of the Canadian currency, Bank of Canada governor David Dodge said Thursday that the loonie is close to its fair value against the U.S. dollar.

The loonie closed at 99.09 cents US on Thursday.

Testifying before the Senate banking committee for the last time, the outgoing central bank head said the currency's wild roller-coaster ride of the past several weeks remains largely inexplicable, but a loonie close to parity with the greenback is justified by fundamentals.

The bank governor and Finance Minister Jim Flaherty have voiced concern about the value of the dollar in the past.

Last month, they complained at an international meeting of finance officials that Canada had absorbed one-third of the greenback's depreciation since 2002.

Dodge stuck by that number Thursday, saying that Canada has taken a disproportionate hit from the U.S. dollar's decline even though Canada accounts for about 16 per cent of U.S. trade, the same as Europe and China.

"But we should be quite clear that at least some of that correction is entirely appropriate because we've had a big improvement in our terms of trade against the U.S.," he told the senators.

"If you leave aside this awful experience with the spike that took us from $1.00 to $1.10 and back to $1.00 in the course of several weeks, the answer is that more or less the move from a mid-60s cents value to the mid-90s cents value accords with what was going on from a domestic perspective." 

Dodge countered critics who urged him to cut interest rates to rein in the dollar and save the manufacturing sector, saying this would not have helped factories and "we would have simply had inflation higher than what we got
now." 

"In the real sense, Canadian manufacturers would not be any better off because they'd be paying higher wages and higher domestic costs."

Monetary union with U.S. a non-starter, Dodge says

Dodge, who will hand over the central bank's top job to former Finance Department official Mark Carney at the end of January, backed up his designated successor's testimony Wednesday that it would be a mistake to peg the loonie at a fixed value against the U.S. dollar, or for Canada and the United States to adopt a single currency.

"Monetary unions should follow economic unions, not vice-versa," he said. "Without that, a single-currency union is likely to bring trouble."

Explaining the bank's decision Tuesday to trim short-term interest rates by a quarter percentage point, Dodge said worsening difficulties in financial markets, the ongoing U.S. subprime mortgage crisis and weakening U.S. demand had lessened the risk of inflation and increased the likelihood the Canadian economy will run into a rough patch.

He predicted growth will slow through the current quarter and the first half of next year before recovering later in 2008.

Earlier, the Bank of Canada released a report suggesting an "unexpected shock," such as a chaotic collapse of the U.S. housing market, could have severe repercussions for Canada.

But Dodge laid out no doomsday scenario to the senators, although he cautioned that tight credit conditions are lasting longer than anticipated. He said this is primarily because investors, having been burned once, remain skeptical of complex structured investment instruments with opaque underlying assets.

"Now we have a problem that financial institutions have to market all this stuff where there is no market for them."

He said some of these assets are being offered at firesale prices, when their underlying value is much higher. In Canada, he said banks remain healthy but there is $30 billion or more of asset-backed commercial paper outstanding that is not secured by bank resources.

"There are losses, absolutely there are losses, but until we dig through all this, there's going to be great uncertainty," he said.