Businesses are adjusting to the higher Canadian dollar and remain optimistic about their prospects, the governor of the Bank of Canada said Wednesday.

Speaking to the Board of Trade of Metropolitan Montreal today, David Dodge talked about the longer-term trends and the challenges facing the Canadian economy in the years ahead, and the adjustments that will be necessary to meet those challenges.

Dodge said a bank survey of businesses taken late last year suggests the stronger loonie has prompted quick reaction. “Most firms are acting to raise productivity, as well as cutting costs, adjusting supply chains and hedging their currency exposure among other efforts,” he said

Although the dollar has slipped in recent days to about US75¢ from a high of about US79¢, it remains well above the US68¢ level of a year ago.

Dodge said the bank will watch the dollar closely when it comes time to set interest rates next month.

A higher dollar makes Canadian exports more costly, but it can also have benefits, he said.

“Because it makes machinery and equipment less expensive relative to labour, a stronger currency is in line with our need to increase productivity.”

Overall, he said, the higher dollar should encourage shifts of labour and capital into sectors which feed domestic demand.

“We know that with a stronger currency, the economy will have to rely more on domestic demand and less on foreign demand for ongoing, solid growth.”

The adjustment can be painful and difficult, “but in today’s world, not adjusting is not an option.” Dodge assured Canadian business people that they can count on the Bank of Canada to pursue the appropriate monetary policy that will help sustain aggregate demand and facilitate the adjustment to a changing world.

Dodge said the general economic climate is favourable.

“Many elements currently support investment: inflation remains low, stable and predictable and credit conditions are favourable.

“Business confidence and balance sheets are strong and equity markets are performing well.”