Relationship Between Rising Us Unemployment and the Canadian Dollar

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  • Topic: United States, United States dollar, Canadian dollar
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  • Published : March 14, 2012
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Is there a relationship between rising US unemployment and the rise of the Canadian dollar?

Canada’s financial stability depends on the health of America’s economy, as international trade accounts for 45% of Canada’s Gross Domestic Product (GDP) and 79% of exports are to the United States. Canadian and American unemployment rates are positively correlated for that reason, as exemplified in early 2009. Canada’s unemployment rate quickly steepened as the United States’ rate gradually increased to about 10% (refer to graph 1 and 2). During this time, Canada’s growing trade surplus became a deficit in only a few months (refer to graph 3). From this data, one can determine that Canada’s exports decreased rapidly due to rising economic turmoil in the United States. The effects on the dollar seemed to positively correlate.

Canada’s dollar decreased in value compared to the US dollar; however, concluding that the reason for this change was due to the U.S. unemployment rate is inaccurate. The ever-changing exchange rate of the dollar is determined by many factors. As of 2011, Canadian and American unemployment rates remain high at approximately 7.3% and 9%, respectively. In addition, a trade deficit continues to exist in Canada. Nevertheless, the Canadian dollar is gaining strength over the American dollar, which contrasts with the weakened exchange rate in 2009 when the same conditions existed (refer to graph 4). Therefore, rising U.S. unemployment can have a positive or negative affect on the Canadian dollar. I will examine how the increasing U.S. unemployment rate can potentially strengthen or weaken the loonie.

A rise in U.S. unemployment can indicate a relationship with the rise of the Canadian dollar. The increase in U.S. unemployment is a result of America’s 2008 recession. When unemployment increases in America, the U.S. Federal Reserve needs to decrease interest rates in order to stimulate the economy (as exemplified in graphs 2 and 5). If interest...
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