Being at par with the U.S. dollar was good while it lasted, but, as many economists had predicted, the Canadian dollar has finally started to come back down to earth.
Whenever our dollar is worth more than its U.S. counterpart, the Canadian psyche gets a boost. This was the case back in the 1970s when the Canadian dollar traded in the $1.04 U.S. range and again more recently, when the dollar topped out at $1.05 U.S. in July 2011. We get a swagger in our collective step when we travel to the United States and see how much further our dollars go. We get frustrated when retailers aren’t quick enough to reflect our newfound currency superiority in their prices. But deep down, there’s also a sense that sooner or later our dollar will give way to the currency of our neighbour to the south. If you were following the dollar debate among economists recently, you knew that it was likely only a matter of time.
Why down now?
Beginning in 2013, the Canadian dollar really began to slide, losing 6.6% before the year ended and by the end of the first quarter of 2014, it was down a further 3.9%, dipping below 90 cents U.S. – the lowest level since July 2009. There are two key factors behind the dollar’s downturn. First, the U.S. currency is strengthening, and not just against the Canadian dollar but against many currencies. The surge in the U.S. dollar is partly due to an expectation of accelerating U.S. economic growth, and partly due to the increased demand for U.S. dollars as investors move out of emerging markets in a flight to quality. Secondly, the downturn in materials prices and Canada’s overall weaker economic conditions have put downward pressure on our currency relative to the U.S. greenback.