The Canadian dollar’s recent rise is an historical aberration. For most of its history, the currency floated at a depressed rate that hovered between two-thirds and three-quarters of the value of the U.S. dollar.
This encouraged tourism and made the country’s exports competitive on the global market. In fact, Canada’s economic performance was the envy of other developed nations for much off the late 20th century. Tourists from the United States flocked to Canadian hot spots like Niagara Falls, Montreal and Vancouver. Meanwhile, Canada’s manufacturing industry hummed along. During the long period of de-industrialization that wrecked the United States so-called Rust Belt, the auto parts factories of southern Ontario continued to hum away.
With a population of only 35 million, Canada has a relatively small home market. As such, it has long been a “net exporter.” In order to keep its economy growing at a sustainable pace, it must maintain a positive trade balance by exporting more than it imports.
For years, the United States has been the primary importer of Canadian goods. From auto parts and medications to lumber and oil, there are few products that American companies won’t buy from Canada. After all, the two countries enjoy a truly unique relationship: They share an unfortified border that’s easy to cross by truck or train and a long history of amicable relations.
Although there have been some trade disputes over the years, there has never been a wholesale issuance of tariffs or even serious threats to curtail the flow of goods between the two countries. As such, the Canadian dollar has remained low for most of its history. While U.S. officials would probably prefer to export more American-made products up north, the allure of Canada’s nearly limitless natural resources has proven too powerful to counteract. Accordingly, the status quo has persisted until recently.
Today, the value of the Canadian dollar is rising for two principal reasons. First, Canada has staggering reserves of oil and natural gas. The country is now one of the world’s largest net exporters of energy. As Canada sells its energy resources around the world, more money flows into the country and drives up the value of its currency.
Secondly, the U.S. dollar is no longer the world’s sole “reserve” currency. Private and state investors around the world now convert excess funds into a variety of currencies, including the U.S. dollar, British pound, Japanese yen and European euro. This has reduced the value of the U.S. dollar while raising the value of some other international currencies. Crucially, the International Monetary Fund recently announced that it would consider designating the Canadian dollar as a de facto “reserve” currency.
The Canadian dollar’s rise has underscored the fact that the country’s economy relies heavily on exports and tourism. In fact, the new arrangement has exposed an economic rift between the country’s two main regional blocs. Oil-rich western Canada has been booming for the better part of a decade and has attracted migrants and investment from around the world. Meanwhile, the economic well-being of now-depressed eastern Canada has long depended upon the success of its manufacturing and tourism sectors.
This dichotomy has created a charged political atmosphere. Many eastern politicians see their western counterparts as harmful to the interests of Canada as a whole. The Westerners argue that the country’s energy boom has lifted its economic fortunes in the aggregate and increased its international profile to boot.
While both claims have some merit, one thing is clear: Canada’s national leadership is only tolerating the sharp recent rise in the Canadian dollar because its oil and gas exports remain competitive on the global markets. Were the price of energy to fall rapidly, it’s likely that Canadian officials would take hasty steps to devalue the country’s currency and refocus its economy on manufacturing, tourism and trade.