Hitting Par: The Canadian Dollar vs The American Dollar

In over 30 years, since November 1976, the US dollar and Canadian dollar have not been par until now. As the Canadian economy has been progressing over the years, the US economy seems to have fallen behind with all its turmoil. The war in Iraq has not helped the US economic situation but rather offset the deficit, and in a move to avoid the forecasted economic recession due to the credit crunch, the feds cut interests rates by 0.5 points to 4.75 percent.

The move to cut interest rates to ease the mortgage industry has weakened the US dollar against foreign currency including the Euro, and giving the push for the Canadian dollar to hit parity with the US dollar. One US dollar now buys one Canadian dollar. But the Canadian dollar’s gain isn’t only linked to the US federal interest rate cut, but can also be seen as the Canadian economy has been booming in an upward gain from 2006 with a low inflation rate, and a red hot oil industry.

This rapid progression of the Canadian dollar against the US comes as a shock to some Canadians, who measured the Canadian dollar value at .62 USD only four years ago in 2002, and now hitting par seems too good to be true.

As Jeff Rubin, chief economist and strategist at CIBC World Markets, stated, “the Canadian economy that once used to be the sleepy little resource backwater of the North American economy is certainly turning the tables on its big brother in a hurry."

So what does all this have to do with Canadian and American dealings with each other? Well, for starts there will be an increase in American exports as buying from the American markets will become cheaper for Canadians. Although, vice versa Canadian exports to America will also decrease, as it will simply cost more for Americans to buy Canadian manufactured goods.

The Canadian tourism industry will also suffer, as more American visitors will decline as the dollar parity discourages Americans from shopping in Canada, since the one time savings of up to 40%, due to the dollar value, will no longer be available to Americans.

Although, Canadians will suffer in sales, they will gain in purchasing from American based businesses, and buying cars from the American side is becoming more attractive to some Canadians. As car prices in Canada are much higher than in America, a lot of Canadian shoppers will find drastic savings by traveling south of the border to buy a car. The difference in prices may not be the greatest for all cars, but gaps in some categories such as luxury sports cars, will save a Canadian buyer almost $14,000 on average.

But the high loony will put pressure on Canadian companies that are dependent on exporting to the US, who is also Canada’s largest trading partner. Already, in 2006 there were almost 100,000 job losses in southeastern Ontario, due to the rising Canadian dollar against the US dollar.

Even with such a massive job loss, the Canadian economy is still doing well, as the manufacturing sector loss a total of 289, 000 jobs since 2002, the Canadian economy has created over one million jobs in resources, construction, services, health care, education and financial industries, leaving the national jobless rate at 30-year low.

In contrast the Canadian dollar seems to be stronger over the American for the time being, but only time will tell the future of the American dollar vs. the Canadian. If asked to predict, there is always uncertainty, but given factors such as future interest rate cuts by the Americans, could possibly even lower the US dollar compared to the Canadian, and this could become reality in the next 6-12 months.