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Canada should permanently tie its currency to the United States dollar, probably at about the current exchange rate under which one Canadian dollar buys about 68 U.S. cents, Nobel prize-winning economist Robert Mundell said yesterday.

Mr. Mundell, whose work on optimal currency areas was recognized last year as the intellectual foundation of the euro, said small countries can gain advantages from fixing their own currencies to one of the world's three major currencies -- the U.S. dollar, the euro and the Japanese yen.

In Canada's case, a fixed relationship with the U.S. dollar "would give Canadians the benefit of American monetary policy, which is better than Canadian monetary policy," he said.

Speaking to a group of journalists, Mr. Mundell said the weakness of Canadian policy is evident in the slide of the Canadian dollar over the past 25 years from rough parity with the U.S. dollar to its current level.

"California has a better monetary policy than Canada because it is part of a larger currency area," he said.

However, the Canadian-born Mr. Mundell said any currency tie to the United States could only be carried out with broad support from Canadians. The major political parties, business and labour leaders would all have to reach a consensus on the issue and involve the public in a decision.

Mr. Mundell said there are three ways to link currencies, but two are impractical or too costly. Proposals for a common North American currency covering Canada, the United States and Mexico will flounder because Americans "would never give up the U.S. dollar," which he called the most successful currency of the 20th century.

Adopting the U.S. dollar completely -- known as dollarization -- would mean that Ottawa would lose the revenues it earns from coining money and Canadians would lose a national symbol.

Mr. Mundell's appearance in Toronto was organized by State Street Trust Company Canada, a unit of Boston-based State Street Corp., which provides back-office services to mutual funds and pension plans.

He said the dollar and euro will continue to extend their influence during the next decade. By 2010, the euro will be used by almost 30 countries in Europe and others in Africa, making it just as powerful as the U.S. dollar.

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