Back and Forth - The U.S. Dollar vs. the Canadian Dollar

Yesterday I reported that the Canadian Dollar had fallen half of a cent relative to the U.S. Dollar because more interest rate cuts were likely to come at the beginning of September. Not to be outdone U.S. Federal Reserve Governor Ben Bernanke made comments that sent the Canadian Dollar up almost a whole cent relative to the greenback.

The Reuters story Canadian dollar soars on dovish Fed comments reports that in "a speech, U.S. Federal Reserve Governor Ben Bernanke said policymakers would be prepared to cut interest rates all the way to zero if necessary to prevent a fall in inflation. He added the Fed could yet resort to unconventional monetary action like outright purchases of long-term bonds." Since the interest rate gap between Canada and the United States may actually be rising in the future rather than shrinking, we've seen the Canadian Dollar rise even higher in value.

Important Links

• To learn more about how beliefs about future changes cause prices such as the interest rate to change today see "How Markets Use Information To Set Prices".

• To learn more about how central bank reactions to inflation and deflation influence interest rates see "What is deflation".

• To learn about the link between exchange rates and interest rates see my "Guide to Exchange Rates".

• You may also want to see "The Canadian Exchange Rate" which details the performance of the Canadian Dollar during the first half of 2003.