The Canadian Dollar has dropped over 2 cents this week relative to the U.S. Dollar and the selloff may continue if investors do not believe a recovery is coming or that interest rates won't be cut.

The CBC News reports that the high values of stocks may also be prompting the selloff. Although it's given second status in this article, the fact that the Bank of Canada is likely to cut interest rates is most likely the culprit. Unlike the United States, interest rates have actually been rising in Canada, as shown on this table from the Bank of Canada. The significantly higher rates in Canada has caused investors to sell U.S. Dollar bonds and buy Canadian Dollar bonds, thereby raising the Canadian Dollar. It appears that the trend will be reversing, as Canadian rates start to approach those in the U.S.

Important Links

• 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.