View from the Edge

One of the common themes of my life, as far as Canadian news stories are concerned, has been the comparison of value between Canadian and American currency. From the first time I can remember being aware of “current events” the low value of the Canadian dollar compared to the American one has been a story. When I first became aware of currency values, in the 1970’s, Canada’s dollar was valued very low against the US dollar, and at one point it was worth less than 77 us cents. This past Friday, the Canadian dollar continued its move in the other direction, setting a new 30 year high at over 97 US cents, as we edge ever closer to complete parity with the US currency.

There are probably a number of reasons this is happening, in todays world. Because of Canada’s physical proximity to the US, and its relative size, it makes sense that Canada discusses its own economy largely in terms of its comparison to US numbers. Canada’s currency is rarely compared in the news to other world currencies like the Pound, Euro, or Yen … instead, its value is always tracked against the US dollar, and so its worth asking whether Canada’s currency is increasing in value, or the US dollar is decreasing in value. Comparing only to the US value, its hard to get a full idea of the relative strength of Canada’s currency overall.

Currency really has no value, in and of itself. Unlike commodities, which are valuable for what they are, currency is valuable only for what it represents in terms of buying power. There was a time when that buying power was backed directly by commodities valuable in a direct sense. When the world worked on a strict Gold Standard, any currency in circulation had to be directly backed by gold reserves, ensuring the TRUE value being represented by the currency. Under the gold standard, one Canadian dollar (or one US dollar, or one Japanese Yen) is worth a certain amount of gold, in a direct way … that amount of gold MUST be in reserve to guarantee the value of the currency. But under our current system, the notion of “real” value has been dropped. Modern currency exchange is done by valuing currencies in relation to each other, rather than to the value of a commodity (such as gold). A currency truly has NO value, outside of its value compared to other currencies.

Because of this, the way we need to determine how Canada’s currency is truly doing is by looking at the comparison of both dollars against other world currencies. From the following comparison, its pretty easy to see that the real answer to whether we are going up, or the US is going down, is, in fact, both.

U.S. Dollar vs. 6 Currencies

1. Against Canadian Dollar: Down 10.58%
2. Against Euro: Down 5.69%
3. Against British Pound: Down 2.74%
4. Against Japanese Yen: Down 3.66%
5. Against South Korean Won: Down 6.21%
6. Against Mexican Peso: Up 0.88%

Canadian Dollar vs. 6 Currencies

1. Against U.S. Dollar: Up 11.88%
2. Against Euro: Up 5.52%
3. Against British Pound: Up 8.80%
4. Against Japanese Yen: Up 7.79%
5. Against South Korean Won: Up 7.75%
6. Against Mexican Peso: Up 12.86%

from economics.about.com

It’s pretty easy to see that Canada fares well against other modern currencies. This is certainly not a full list of other currencies, but it does cover many major ones, and its worth noting that the only currency the US has gained value against is the Mexican Peso, while Canada has gained fairly substantial value against all the chosen currencies.

Clearly, a US dollar that is losing value against other world currencies is one reason for Canada’s rise in value. But its equally clear that a Canadian dollar rising significantly against the same slate of currencies shows some strength in and of itself and is cause for celebration of our economy. For all of my life that I’ve been aware of currency, the Canadian dollar has been poorly valued against other world currencies. Its nice to finally see near parity with the US dollar, even if part of the reason is a weaker US dollar. Its especially heartening to see the Canadian dollar so strong against other currencies as well … this is really the first time in my life that the Canadian dollar hasn’t seemed undervalued to me.

The Dollar value by View from the Edge, unless otherwise expressly stated, is licensed under a Creative Commons Attribution-Share Alike 2.5 Canada License.