The Canadian dollar

When the one dollar bill gave way to the 'loonie' coin in 1987, the Canadian dollar was in the middle of an upward trend against the U.S. dollar. Lasting the rest of the decade, the upswing was explained by various factors, including a buoyant economy and a tightening of monetary policy. The dollar closed the 1980s at US$0.863.

The loonie continued to climb against its American counterpart in the early 1990s. Cresting at US$0.893 in November 1991, it began to depreciate thereafter. Weakness in the currency intensified once again in 1997 and continued for the rest of the decade, despite a strong Canadian economy. The weakness continued into the new century with the dollar reaching an historic low of US$0.6199 in January 2002. The Canadian dollar averaged US$0.6368 over 2002.

Like the currencies of most industrialized countries, the value of the Canadian dollar is set by a floating exchange rate mechanism, whereby its price fluctuates according to international market conditions. These conditions, as well as speculative activity, can sometimes put the Canadian dollar through periods of volatility and price instability. During these periods, the Bank of Canada may intervene—but rarely does—in the international market by buying or selling Canadian dollars. When the Bank buys large amounts of Canadian dollars, demand for the currency is stimulated and upward price pressures result. Selling generates the opposite effect.

Though Canada has experimented with fixed or managed exchange rate policies in the past, it has generally favoured a flexible exchange rate. Recently, the debate on exchange rate regimes has been renewed in Canada and abroad.