Understandably most investors are somewhat risk-averse, so they will avoid unnecessary risk. Investors during times of international turmoil prefer to invest in large countries that are more insulated from turmoil in other counries. The United States is a haven for investors trying to avoid this type of uncertainty, whereas smaller open economies like Canada are not. So not surprisingly the Canadian dollar declined during the Asian crisis.

This still doesn't explain why the Canadian dollar declined from 1998 to 2002. Unfortunately I can't provide any solid evidence of why this happened, but here are three possibilities.

1. The Bush Election win:
   The Republicans are seen as a party which will create an environment positive for investors. It is conceivable that many international investors moved their money from Canada to the United States when the White House went from Democratic to Republican control.

2. International Uncertainty:
   As mentioned before investors will flock to a country like the United States during time of unrest. Investors have been worried that a global recession might occur during the beginning of this decade. Terrorist threats and military actions in Afghanistan and Iraq may have caused investors to put their money into large countries like the United States.

3. The Beliefs of Currency Speculators:
   Many currency speculators felt that the Canadian dollar would continue to decline in the future. Many investors did not want to be part of a sinking ship, so they sold their holdings of Canadian dollars, further reducing the price. If investors feel that the Canadian dollar will improve in the near future, they will jump back on the bandwagon by buying Canadian dollars and the value of the Canadian dollar will rise. It appears this is what has been happening in the beginning of 2003.