Canadian Dollar Reaches Parity With U.S. Dollar
Mathew
Shane and Paul
Sundell
In September 2007, the Canadian
dollar reached parity with the U.S. dollar for the
first time since 1976. In reaching this mark, the
Canadian dollar had appreciated more than 33 percent
against the U.S. dollar since February 2002, when
the Canadian dollar reached a low of 1.6 to 1 U.S.
dollar. While other major currencies have appreciated
at a similar rate against the dollar over the same
period, none is more important to U.S. trade than
Canada’s.
Canada, which accounts for about
20 percent of total U.S. trade, is the largest destination
for U.S. exports and the leading source of U.S.
imports of products and services. Canada’s
status as top trade partner is due to its long common
border with the U.S., similar cultures and tastes
in the two countries, and greatly increased trade
liberalization resulting from the Canadian Free
Trade and the North American Free Trade Agreements.
Canada is also the largest agricultural
trading partner for the U.S. Factors boosting Canada’s
agricultural trade ranking include slowing growth
in food and agricultural demand in Japan and Europe
and greater integration of agricultural production
between the United States and Canada. For instance,
while Canada is the largest destination for U.S.
horticultural products, the U.S. is also a major
importer of Canadian hothouse tomatoes.
Changes in exchange rates are
a powerful mechanism for encouraging and discouraging
trade. When a foreign currency appreciates relative
to the dollar, U.S. commodities and products become
cheaper in the foreign currency—boosting demand
for U.S. exports. The partner country’s products
become more expensive in the U.S—dampening
demand for its imports.
Recent developments in U.S.-Canada
trade illustrate this tendency. With the appreciation
of the Canadian dollar, U.S. agricultural exports
to Canada have been increasing much faster than
agricultural imports from Canada. U.S. exports of
fruit and nuts, fresh vegetables, and beef increased
at an annual rate of 10.7 percent between 2002 and
2007, after an annual growth rate of only 3.5 percent
during the previous 5 years.
Total agricultural imports from
Canada grew 6.5 percent over this period, down from
a previous rate of 7.1 percent. U.S. imports of
Canadian meat and bakery products grew particularly
slowly. Since adjustments to changing exchange rates
take time, this pattern of increasing export growth
and declining import growth is likely to become
stronger over the next few years.
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