Canadian dollar nears parity with U.S. greenback | Print |  E-mail
Written by Kaveh Khazra   
Thursday, 11 March 2010 14:57

The value of the Canadian dollar is on the rise and industry experts say it threatens to trump the value of the greenback in coming months.

loonie
A CIBC World Market report speculates that the loonie will pass the greenback by the summer. (merlineprincess: Flickr)
According to a report by CIBC World Markets on Wednesday, the Canadian dollar, currently trading near a two-month high, will pass parity with its U.S. counterpart by the summer.

The loonie’s impending rise is being linked to expectations that interest rates will be rising soon, which will affect the value of the dollar.

"That is the way in which these solid numbers are driving the Canadian dollar," BMO's deputy chief economist, Douglas Porter, told thedailyplanet.com.

"The view is that the Bank of Canada will begin to raise interest rates by mid-year, he said. "Ultimately more aggressively than the federal reserve as well."

Some economists say more factors are involved.

The Conference Board of Canada’s director of international trade and investment centre, Louis Theriault, explains that it is actually the difference between Canadian and U.S. interest rates that fluctuate both currencies.

“If interest rates go down in Canada and doesn’t go down in the U.S., it means that it makes the Canadian dollar less attractive,” said Theriault. “So chances are the dollar value will go down because people will buy the American dollars instead of Canadian dollars.”

“Canada, relatively speaking, is in a better situation than the U.S. so we could see the interest rate in Canada go up more quickly,” said Theriault. “So that can increase the value of the Canadian dollar.”

Theriault expanded on the reasons why the Canadian dollar is so strong by explaining other consequences that impact the value of the dollar.

“The first one is commodity prices,” he said. “If the price of oil goes up - because we sell a lot of oil ourselves - it turns into demand for Canadian dollars.”

“When we sell oil, those sales are converted into Canadian dollars, which increases demand in Canadian currency,” said Theriault.

So what does the rise in the loonie mean for the Canadian economy? According to Theriault, there will be positive and negative outcomes from the jump.

“Traditionally, we have seen it as a negative because of exporters taking a hit, particularly manufacturers,” he said. “If you get less for what you sell to the U.S. when the dollar is strong in Canada, you also pay less for what you import.”

“So yes, we export a lot, but we import a lot, so it plays both ways,” said Theriault.

Today, the Canadian dollar is up 0.06 per cent to 97.65 cents to the U.S. dollar.