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Canadian dollar essay

During the last decade, the value of the Canadian dollar has experienced a decline, which has influenced Canada`s economic status at home and around the globe. This situation has created several questions and few answers to why this has occurred and continues to be observed. ?A decline in the Canadian dollar from about 86 cents US in 1990 to about 63 cents US today, a decline of more than 25 percent. In fact, in the last decade, one Canadian dollar bought in terms of foreign currency has decreased overwhelmingly. For example, against the British pound, the Canadian dollar has lost about 9 percent of its value over the last ten years. In November 2001, the Canadian dollar hit an all time low of US $0.623. But, this was not an unforeseen development. For the last ten years, the lonnie has been spiraling downwards. After reaching a peak of US $0.8934 in 1991, the Canadian dollar has fallen to US $0.73 in 1996, US $0.6211 in 1998 and finally below US $0.63 in late 2001. The low level of the Canadian dollar during the last decade is evident; however, the more vital realization is what measures must be taken to raise the value of the Canadian economy to preserve an optimistic future for Canada.

The Canadian dollar has diminished in the last 10 years, which can be explained by the fall in demand for the Canadian dollar. Canada runs a floating exchange rate system where private investors determine the value of the Canadian dollar through a system of supply and demand. There fore, if there is an increase in Canadian investment, then the demand for and the value of the Canadian dollar goes up. On the other hand, if there is a decrease in Canadian investment, then the demand for and the value of the Canadian dollar goes down.? Over the last decade, a combination of factors has reduced the demand and value of the Canadian dollar. The more important factors include low interest rates, high government debt, Quebec separatism and declining commodity prices. In fact, alone, none of the following factors would have pushed the dollar down so drastically. But, all together, it created an extreme result of loss for the Canadian dollar.

The four factors mentioned were largely the cause of the decline of the Canadian dollar. ?Interest rates set the amount of interest charged for loans. But, more importantly interest rates also set the returns on financial assets such as bonds. Therefore, if interest rates are high, then investors are more likely to buy Canadian bonds from which they will get a higher return on their investments. This higher level of investment increases the demand for and the value of the Canadian dollar. However, over the last decade, the Bank of Canada kept interest rates low relative to the United States. Another factor included the Debt/GDP ratio which refers to the amount of government debt relative to a country’s income.A high debt/GDP ratio will make a country less attractive to investment and put downward pressures on a currency. The preferred debt/GDP ratio is 40%.? During the 1990s, Canada’s debt/GDP ratio fell to 64%. However, this ratio remained far above the preferred level. The third factor had to do with Quebec separatism. If Quebec separates from Canada, many suggest the transition will cause great economic disruption and result in weaker economies for Quebec and the rest of Canada. The ongoing threat of separation makes Canadian investment less attractive and places downward pressures on the Canadian dollar. The last factor was in correspondence with declining commodity prices. As a commodity producer (i.e. raw materials such as lumber or minerals), the Canadian economy is stronger when commodity prices are high. During the mid-90s, commodity prices began to fall drastically. This makes Canadian investment less attractive and puts downward pressure on the dollar. These overwhelming factors, all together contributed in the downfall of the dollar through the 1990s and continue to be a real problem. Even though the extent of the problem may have decreased, we are still far from a solution.

An exchange rate is always expressed in terms of two currencies, there are always two sides to the same coin. In our case, a low Canadian dollar on one side and a high U.S. dollar on the other side. The question is not necessarily why the Canadian dollar is so low? But why is the U.S. dollar so high??? This may give us some ideas and approaches that should be done to raise the value of the Canadian currency. First of all, the U.S. dollar has indeed appreciated strongly against most major currencies, so perhaps the right question to ask is what is driving the surge in the U.S. dollar. It has been argued that the U.S. dollar is often viewed as a safe haven`t in tumultuous times. But this alone cannot explain the continuing rising of the U.S. dollar. Other explanations have pointed to the attractiveness of investment opportunities in the United States. If this is true one must ask why the investment opportunities in Canada look less attractive. First of all, the Bank of Canada has the instruments to stabilize the exchange rate. If it raises interest rates, this tends to strengthen the dollar. However, the Bank is already committed to one objective, price stability. So if the Bank of Canada were to increase interest rates to boost the value of the Canadian dollar, it would not pursue the price stability objective at the same time, because monetary policy can only have one target at a time. Raising interest rates makes money affordable, and businesses may postpone investment. Propping up the value of the Canadian dollar therefore comes at a price. Many economists think that this would be too high a price to pay during a time of unsustainbility in the stock market.

The other question that can be raised is whether a low Canadian dollar is beneficial for the greater good of Canadians. In fact, there are several benefits of a low Canadian dollar. For example, a lower Canadian dollar makes import purchases more expensive, which will encourage Canadians to buy Canadian products and in turn help the domestic economy. Furthermore, a low Canadian dollar is also good for tourism, because Canada becomes a more affordable destination for U.S. travelers. However, over a longer period of time there are repercussions, because of the increase in import prices, a falling Canadian dollar contributes to an increase in consumer prices, and thus inflation. The Bank of Canada may need to increase interest rate to control rising inflation. This comes at a cost to the entire economy. Moreover, a declining dollar would cause an increase in Canadian living cost and over a long-term period Canadian competitiveness would decrease, since Canada would not be able to keep up with the other nations. Therefore, certainly in reality there are more benefits in sustaining and improving the value of the Canadian dollar.

In the last ten years, the value of the Canadian dollar has been spiraling downwards created incredible problems that are not being fully attended to by the Canadian government. In fact, recent data from December 2002 indicates that the dollar continues to fall. For example, ?the dollar ended the day at 63.71 cents (U.S.), 0.91 cents lower than its close on Tuesday, the last full day of trading before the two-day Christmas and Boxing Day holidays in Canada. Traders have been fleeing the dollar this week as concerns grow of a possible U.S. led attack on Iraq. News from North Korea that the country’s officials were moving to expel United Nations nuclear inspectors and reactivate a laboratory able to produce weapons-grade plutonium also worked against the currency.The Canadian dollar tends to get bruised and battered during periods of heightened global tensions,? said Derek Burleton, senior economist at Toronto-Dominion Bank. These growing international problems are not aiding the cause of the Canadian dollar, therefore, the government, at municipal, provincial and federal level must take some form of action and measure to secure the Canadian economy and currency. The diminishing value of the Canadian dollar can be ceased if the right precautions are taken, and then one will witness a great victory for the people and the future of Canada.

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