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The impact of the surging loonie

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On December 5, 2005, the Canadian dollar hit US 86.04 cents, its highest level since 1992 and the culmination of a run that began in early 2003. Several positive economic factors-such as trade surpluses, attractive interest rates and rising commodity prices-combined to drive the dollar up vis-à-vis its U.S. counterpart. This has presented both challenges and opportunities for the Canadian economy.

When the Canadian dollar changes value relative to its American cousin, the effects are most obvious in our export sector. For example, over the course of 2003, Canadian exporters faced stiff competition as their products became significantly more expensive for American buyers. Since exports account for such a large share of our economy-and since Americans buy up 82% of them-any decline in our export trade will have an impact on our economic well-being.

Chart: Exchange rate, United States-CanadaStill, many Canadians welcome a stronger loonie. It makes imports more affordable and reduces the value of debts that Canadian governments, businesses and individuals are holding in American dollars. Companies that buy supplies and equipment in U.S. dollars but sell in Canadian dollars are also likely to benefit. In addition, snowbirds and other Canadians visiting the United States will see their travel dollars go further.

Another result of a rising loonie is that it encourages Canadian exporters to become more efficient. While our dollar's rapid and sizable rise makes it more difficult for Canadian companies to compete globally, it also provides an incentive to improve productivity. Moreover, a lower U.S. dollar makes the imported software, machinery and technology that we require to improve our productivity more affordable.