International trade of goods and services: When a country has a trade surplus, exports exceed imports, putting upward pressure on the exchange rate (the demand for the currency exceeds the supply).Sustained, relatively low inflation in Canada has a positive influence on the exchange rate. That reduction would be reflected in a relative decline in the value of the Canadian dollar. If inflation in Canada were to exceed foreign inflation rates, this would reduce the purchasing power of the Canadian dollar relative to foreign currencies. Inflation rates: Inflation is the rate at which general price levels rise over time.The opposite also holds: weaker commodity prices can translate into a weaker Canadian dollar. Since Canada’s effective purchasing power is higher, this movement is usually reflected in a higher exchange rate. When commodity prices rise, Canada’s terms of trade improve because its goods have become relatively more valuable. Commodities represent a larger share of exports in Canada compared to the United States and many other countries. Commodity prices: The value of the Canadian dollar is correlated to the strength of world commodity prices.If foreign investors anticipate a decline in the value of the Canadian dollar, they demand a higher interest rate on Canadian dollar securities. However, the rate of return of foreign investors is dependent on the expected future performance of the Canadian dollar. Interest rates: Relatively higher interest rates in Canada increase foreign investors’ demand for Canadian dollar-denominated securities.
The main factors known to influence the value of the Canadian dollar are: Often, the reasons underlying recent movements are evident only in hindsight. However, predicting exchange rate movements is difficult because these factors interact at the same time. Factors Affecting the Value of the Canadian DollarĮconomic theory and empirical evidence have identified factors that, in isolation from one another, have predictable effects on exchange rates. Factors that increase (or decrease) demand for the Canadian dollar, or that decrease (or increase) demand for foreign currency, place upward (or downward) pressure on the exchange rate. Now, the exchange rate between the Canadian dollar and any foreign currency is determined by the forces of supply and demand, that is, like the value of any other openly traded good or service.
The Bank of Canada was responsible for intervening in the marketplace to maintain the fixed value of the currency. (Disponible en français : Le dollar canadien : les facteurs qui influent sur le taux de change)įrom the beginning of World War II until 1950, and again from 1962 to 1970, the value of the Canadian dollar was fixed in relation to the U.S. The Canadian Dollar: What Determines the Exchange Rate?īy loprespub on SeptemReading Time: 6 minutes Home › Economics and finance › The Canadian Dollar: What Determines the Exchange Rate?
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