A history of the Canadian dollar
TORONTO - The loonie continued to hover in record territory Monday, holding steady above $1.07 US, but it's not the first time in history that the once-battered Canadian currency traded well above the formerly almighty American dollar.
In the 1950s and early '60s, the currency traded in the 102 cent to 106 cent US range before a recession dragged it down and forced John Diefenbaker's Conservative government to peg the loonie in May 1962 at 92.5 cents US, plus or minus one per cent.
The so-called Diefenbuck didn't last a full decade, with the Canadian currency beginning again to float freely according to market forces starting in May 1970.
Within less than four years, Canada's dollar had risen to as high as $104.43 cents US on April 25, 1974. It continued to be worth more than the U.S. currency until shortly after Rene Levesque led the separatist Parti Quebecois to a landslide victory on Nov. 15, 1976, raising national unity questions in the minds of foreign money traders.
Since then, the loonie has spent most of the past three decades below par, falling to as low as 61.79 cents US in January 2002 and, as of Friday, as high as 107.18 cents US - although there's little reason to think the currency is done setting new records.
Some banks predict it could rise to US$1.10 or even higher if oil prices continue to soar and Canada's economy shows further strong jobs growth as it rides the boom in demand for commodities such as wheat, corn, coal, nickel, zinc and other metals.
Although the value of our currency is affected by a lot of different factors - including national interest-rate policies, the domestic and international political situation and the state of government finances - there's one that stands out from the rest.
"If you only had one variable to explain the dollar and you picked commodity prices, you would go a long way," says Don Drummond, chief economist at TD Bank.
In fact, Drummond can list at least three other important variables to consider:
-Inflation, or more precisely, a persistent difference between Canadian and American inflation rates;
-The difference between Canadian and U.S. interest rates;
-And the difference between Canadian and U.S. productivity rates.
Drummond acknowledges these are important influences but says Canada's dollar certainly rises and falls in lock-step with prices for the kinds of commodities it produces.
"And so, if I showed you a chart of commodity prices and the Canadian dollar, you probably wouldn't be able to tell which was which. They track very closely," he says.
"Looking forward, if someone asked me where's the dollar going to go, I would say 'first tell me where you think oil prices are going to go and I'll tell you what the dollar is going to do.' "
The last historical period when Canada's dollar was on par with the American buck was the mid-1970s - about the time the Parti Quebecois came to power for the first time and created international uncertainty about Canada's political and financial stability.
It was also a period of higher interest rates and higher inflation than we've experienced in recent years and a time when oil and gasoline prices were being pushed higher under political pressure from the Organization of Petroleum Exporting Countries.
"The price of oil, of course, went through two shocks in the 1970s and that probably helped raise the dollar to some degree," Drummond says.
"If we look at the end of the 1990s and the beginning of 2000, of course oil prices went very low - almost all commodity prices dipped down - and that was in good part what dragged down the Canadian dollar."
In fact, when the loonie sank to its lowest levels ever in the global economic downturn that followed the September 2001 terrorist attacks on the United States - there were loud calls for Canada to adopt the U.S. dollar as its currency or at least use a fixed currency exchange rate.
That was countered, however, by voices both within official circles and the private sector who said a floating currency plays an important role as a shock-absorber when the economy undergoes major upheavals.
David Watt, senior currency analyst at RBC Capital Markets, says the Diefenbaker government's decision to fix the dollar's value at 92.5 cents US was abandoned after commodity prices boomed again amid high inflation in the Vietnam War era.
The inflation - which essentially reflects the eroded buying power of a currency - proved to be such a destabilizing force that central banks decided to wrestle it to a managable range by letting currencies and interest rates float.
Watt says the combination of an inflationary target and a flexible currency "has been a very successful monetary arrangement" - although, he notes, the policy is only about 15 years old.
"And it hasn't really been tested in a true inflationary environment because we had globalization, which sort of kept inflation under control," Watt says. "Inflation will probably be higher in the next five years than it was over the past five or 10 years."
TD's Drummond says that, based on the four main factors affecting currency values, the Canadian dollar shouldn't be above US$1 and nowhere near US$1.07.
"To be unscienfically precise about it, the dollar right now should be trading at somewhere beetween 96 and 98 cents US," Drummond says. "In other words, high but not quite as high as it actually is.
"And using the same factors, I can explain in 2002 a dollar that would get down to the 70-72-cent range. I can't explain 62."
He says that's to be expected because, once momentum gets going in one direction or the other, there is a psychological and a speculative element as well.
"Historically when the U.S. dollar has declined, we have tended to decline with them. And what has broken that pattern right now again comes back to commodity prices. That is the big distinction."