Loonie To Topple American Dollar This Summer

Last October, the Synergy Merchant Services Blog visited the news story of the Canadian dollar’s growing value and its attempt to reach parity with its American counterpart. Interestingly, some economists proposed that the strengthening loonie would pose a threat to the rebuilding of Canada’s economy as it would make Canadian exports more expensive to foreign markets.

In our October 13th post, we quoted Prime Minister Stephen Harper as saying that “the value of the Canadian dollar is a risk to recovery. I don’t think it’s a risk to choking off the recovery but if it goes up too rapidly it does have difficult effects on our economy.”

Today, QMI Agency’s Sharon Singleton reports that the loonie will be at its strongest as soon as this summer. In fact, in an article posted on The Toronto Sun‘s website, she reveals that the Canadian dollar is expected to surpass the U.S. “greenback” in value. By September, she writes, the loonie will likely trade at $1.02 to the American “single”, although it may dip down to about 97 cents by the end of 2010.

Citing a recent report by CIBC World Markets, Singleton notes that the “demand for commodities and the perception of Canada as financially solid” is helping to push up the value of the national currency. The forecast is based on the Bank of Canada’s increasing interest rates that are expected to rise this summer. This would be a half year sooner than an increase expected to be made by the U.S. Federal Reserve.

Most Canadians view the Canadian domination of the dollar wars as a good thing. It makes sense to feel a sense of pride in knowing that your national currency is stronger than that of the United States. However, economists warn again, as they did months ago, that the nation’s manufacturing sector may suffer as Canadian goods become more expensive overseas.

Said CIBC Senior Economist, Peter Buchanan: “The economy has shown more momentum in the recent quarter and the higher dollar may slow things down. We are also expecting the U.S. economy to downshift in the second half as stimulus spending runs out.”

Others aren’t as worried however. Scotiabank currency strategist, Sacha Tihanyi believes that the Canadian economy is currently in a better state to handle the impact of a stronger loonie that it was years ago. As of today, the Canadian dollar sits at 97.89 cents U.S.

Singleton offers more positive aspects of the growing strength of the loonie: “On the upside, the strength in the Canadian currency may help to reduce the impact of inflation, allowing the central bank more leeway in containing rate increases…A perception of Canada as fiscally solid may also help the local currency as other governments around the world struggle to control deficits.”