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Loonies on the Rise
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The Canadian dollar hit a 30-year high against the U.S. dollar last week, at CAD 0.9552 to USD 1.00. That compares to a rate 10 years ago of CAD 0.7297 to USD 1.00, and a low within that decade (18 January 2002) of CAD 0.6199 to USD 1.00, according to Bank of Canada data.

Analysts are speculating whether the two currencies might actually reach parity, which hasn’t happened since November 1976.

Growing demand for Canadian oil, copper, and lumber has helped push the exchange rate higher, gaining a reported 11% in the past four months. Average hourly wages have increased 3.5% in the past year and consumer spending is strong, as is the housing market. South of the border, the U.S. economy has slowed, the housing market has hit a slump, oil refining capacity is hard-pressed to meet demand, and various international issues, such as wars and trade deficits, have sapped some of the strength from the U.S. dollar.

As should be clear from recent announcements of sawmill closures and downtime in PaperMoney, the stronger Canadian dollar, combined with the slump in the U.S. housing market, have pinched the profits of the Canadian forest products industry, which exports about a third of the softwood lumber used to build houses in the United States.

The Forest Products Association of Canada (FPAC) is asking the Canadian government and Bank of Canada to act quickly to limit the negative effects brought about by the rapid appreciation of the Canadian dollar. Since 2002, the Canadian dollar has risen 42% against the U.S. dollar—and 32,000 jobs have been lost from the forest sector.

Even so, Canada’s forest products industry remains one of the country’s leading industrial sectors, accounting for 60% of Canada’s merchandise trade surplus, FPAC notes. And some moderation may be in sight.

Last week the Bank of Canada raised its key interest rate a quarter percent to 4.5% to moderate the potential for inflation. The Bank expects the Canadian economy to grow 2.5% during 2008 and 2009, a slight drop from 2007.

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