More of this Feature • Part 1: Exchange Rates - What are they? • Part 2: Exchange Rates - Arbitrage • Part 3: Exchange Rates - Supply • Part 4: Exchange Rates - Demand • Part 5: Case Study: Canada - Introduction • Part 6: Case Study: Canada - Commodity Prices • Part 7: Case Study: Canada - Interest Rates • Part 8: Case Study: Canada - International Factors

In January 1990 the Canada-to-U.S. exchange rate was around 85 American cents. Less than nine years later, the Canadian dollar had depreciated to 65 cents. This substantial drop in the value of the Canadian dollar has been quite upsetting to many Canadians. Almost every Canadian spends a large fraction of his/her income on American goods and many take vacations in the United States. Since the savings of most Canadians are in assets priced in Canadian dollars, their savings could now buy much fewer American goods and services. This was particularly noticable to Canadian seniors who spend much of the winter in Arizona and Florida. The following chart shows how the Canadian-to-American exchange rate has declined since 1990:

Now we can see the problem, we can investigate what caused this drop. The rapid decline of the Canadian dollar can be explained by the supply and demand framework illustrated in the previous two sections of this article. Here are three factors which caused a change in supply and/or demand and subsequently a devaluation of the Canadian dollar.

Next page > Part 6: Case Study: Canada - Commodity Prices > Page 1, 2, 3, 4, 5, 6, 7, 8.