The Canadian dollar has significantly appreciated against the U.S. dollar since the beginning of 2000. The CAD/USD exchange rate (currency in USD) increased from 0.686 to 1.015 as of March 18, 2011. There was a trend of CAD appreciation in 2003-2008, followed by a rapid depreciation in the second half of 2008. Since the beginning of 2009, CAD has risen sharply and has been trading about at par with USD for the last two years. The recent CAD appreciation was caused by a number of factors and lead to certain economic consequences, which are discussed next. Causes of the Canadian Dollar Appreciation
Appreciation of the Canadian dollar in the last years can be explained by internal factors, such as performance of Canadian economy and interest rates, and external factors, such as commodity prices and weakness of the U.S. economy. State of Canadian economy. Canada has been quickly recovering from the recent recession. For the year 2010, real GDP grew 3.1%, following a decline of 2.5% in 2009. Strong economy makes Canada an attractive target for investors who seek secure returns. This raises the demand for the Canadian currency and, therefore, pushes the exchange rate upward. This argument is supported by the exchange rate fluctuations in the above graph. The Canadian dollar was rising as the economy began to recover in the late 2009. State of the U.S. economy. Rise in CAD/USD exchange rate can be largely attributed to depreciation of the U.S. dollar. The U.S. dollar has historically been a safe investment target for many investors. However, now this situation is changing and demand for the currency is falling. The U.S. economy has been facing serious difficulties in the recent years. The country’s trade deficit was almost $500 billion in 2010, a 33% increase from 2009. The U.S. is also the world largest borrower with a $4,453 billion of foreign debt. Weak economy and high uncertainty are turning investors away from the American dollar, which is supported by its...
Please join StudyMode to read the full document