Canadian dollar was constantly gaining its value at the beginning of 2007. By September, it finally surpassed US$. For the next four months, it continued showing its appreciation by reaching the highest rate of US$1.10380 over the three decades. What’s the cause of such high exchange rate? Here I came up with 3 main points.
The first cause is the U.S. Bad Economy.
Since the United States is by far the largest economy in the world, economic strength in the United States plays a large and important role in determining the global economy. Since the middle of 2007, U.S. started to face the subprime mortgage crisis. Their Economy went into recession. US$ started to depreciate its value. Many investors convert their money to Can$ to protect themselves from the continue depreciation of US$. The demand of Can$ increase，this had led to the higher exchange rate.
Second cause is the rise of commodity price such as energy price and raw materials price. As you can see in figure 4, the commodity price was constantly increasing during the whole year.
Oil prices have risen from a low of $50 in January to a high of $90 (Oct 19), Gold was up about 3%. Copper, nickel, and uranium were up by about 30%. This was a major contribution to the surge exchange rate because when other countries import our goods, they need to exchange more money into Can$, thus creating more demand for the Can$, so the exchange rate went up.
The third cause is the strong domestic economy.
The strong economy made Canada an attractive place to invest. Many investors had a high expectation to Can$, so they put huge amount of money into Canadian market in because of the promise of solid financial returns. This raised demand for Canadian dollars, which in turn raised their price on international markets.
The increase of exports in Canada and the interest rate differential between Canada and U.S. are also two factors that cause the surge in Can$.
The rise in the value of the Can$ in terms of US$ is...