The Canadian dollar went from $1.10 less than two years ago to below 90 cents now. What’s all this about?  When our dollar is high Canadians are proud.  Now that it is plummeting, should we be worried?  Is it good or bad?

The falling loonie is essentially a US dollar story.  The US was beaten down badly due to being at the epicentre of the 2008 financial crisis.   There are many other factors that affect the dollar.  Currency fluctuations are unpredictable and volatile and depend on many factors affecting decisions of currency buyers and sellers.   Prices for key commodities like crude oil have also weakened  and affected Canada this past year.  But again, the recent drop of our dollar is mainly due to a rise in the US dollar with their strengthening economy.

The consensus among economists is that the new normal is a 90 cent dollar.  We are likely to see more swings but our dollar was overvalued at par with the US dollar and 90 cents is more where it should be.

Devaluation is both good and bad. It is definitely bad for sun seekers and cross border shoppers but good news for Canadian tourism, our film industry and especially Canadian manufacturers and their workers.  A low dollar could also spike inflation making life more expensive for consumers and importers but we are far from that at this time.

Broadly, a lower dollar is a good thing for our economy making our goods and services more competitive.  The Bank of Montreal estimate s  that a 10% drop in the loonie represent a 1.5 % GDP growth.

To summarize, the main driver of the current drop in the Canadian dollar is the strengthening of the US dollar.  90 cents is the new normal and overall, at that level, it is for the most part a good thing for our economy.

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