How the Loonie Affects the Canadian Economy

How Strong Canadian Dollar Affects Economy

First Published: ADawnJournal.com April 11, 2010

If you ask a Canadian what the dollar is at, they will probably tell you that it is near the American dollar in value. Most Canadians know where the dollar sits, and that when the dollar is good, so is the economy. However, many citizens do not truly understand just how important the Canadian dollar, or Loonie, is to our economy. So, let’s learn about the Canadian dollar and its effect on the Canadian economy.

For much of the 1990s, the Canadian dollar was well below the American dollar, often hovering around 65 cents. Things were at their worst on January 21, 2002, when the Canadian dollar hit 61.79 cents. From there, things began to improve and the Canadian dollar began to gain immense value, roughly 70 percent, within a few years. By September 20, 2007, the Canadian dollar did something it had not done in 31 years; it reached parity with the American dollar.

During the 1970s, the Canadian dollar was worth more than the American dollar, specifically in the years 1972, 1974 and 1976. On April 25, 1974, the Canadian dollar was actually worth four cents more than the American dollar. In August of 1957, the dollar was worth six cents more than the American dollar.

Typically the Canadian dollar will do better when commodity prices are higher. We have many resources, so when resources are more expensive, we make more money. Some of the resources that we have which are the most valuable are oil, copper, gold and wheat. When the price for goods and services increases, the value of the dollar also goes up, along with the Canadian economy. What does this mean for the Canadian economy then?

Well, when our dollar is at par with the American dollar, which means that goods in the United States are 60 percent cheaper than they were in 2002. This means that we can buy items in the United States for much less, and the government can then import items from the United States for less. For Canadian investors, things are not as good because the gains in the Canadian dollar wipe out the gains they have enjoyed. For example, when the Canadian dollar rose to par with the American dollar, the Dow Jones had enjoyed an 11 percent increase since the beginning of the year. In contrast, the Canadian dollar went up 23 percent in that same time period, thereby eliminating the gains felt by Canadian investors.

While it is cheaper to import goods from the United States, it is much more expensive to export goods, which makes Canadian exporters hurt. American companies are not coming up here as much because it is now more expensive to do business. Between 2002 and 2007, 250,000 manufacturing jobs were lost as a result of this surging dollar.

As we can see, there is a flip side to all of this. When the Canadian dollar is down, it costs more to import but more American businesses are funneling money into Canada because it is cheaper. In contrast, when the Canadian dollar is up, it is cheaper to buy from the states but exportation of our goods is more expensive which means less American companies buying from Canada.