The Canadian Dollar and the Effects of the Foreign Exchange on the Country's Macro - Research Paper Example

Tracing the Relationship between the Canadian and American Dollar Canada in 1841 adopted a Canadian pound equivalent to 4 U.S dollars. The country in 1850 faced challenges of adopting a solitary currency for the four provinces. The country also faced challenges of whether to adopt a U.S based monetary system or the sterling monetary system. The local population, because of trading and influx into Canada by the neighbouring Americans, preferred the American dollar as their sole currency (Bordo, & Schembri, 2010).

However, the colonising authority in London preferred the sterling pound, as the sole currency in all its colonies or empires. The Canadian Legislative Council in 1851 introduced the sterling pound and the American dollar as the two currencies for Canada. The idea was to correlate the Canadian monetary to the American fractional coinage. In 1853, the Gold Standard was introduced, followed by the demonetization of all other currencies. The creation of Dominion of Canada led to the unification of the different currencies in Canada; dominion currency system based on the American dollar (Bordo, & Schembri, 2010). . The bank observes analysis and highlights the domestic and global financial trends, which enable it to advise the government on the nation’s financial goals (Bailliu, & King, 2009).

The Canadian government influences the value of the Canadian dollar. The government intervenes regularly in the exchange market; to influence supply or demand of the Canadian currency. The Canadian government policy on its currency (monetary policy), prefers the currency not to have a fixed price, but flow with international trends. The policies prefer a moderate and slow foreign exchange to an extreme and drastic change. The government also prefers the Canadian dollar not to be too strong or weak to the U.

S dollar (Kozak, & Staskow, 2011). Trade is another influential factor in the association between the two nation’s currencies. Canada’s main international trading partner is the United States. This is favoured by the fact that the two nations neighbour each other. The foreign exchange rate plays a vital role in this trade. Therefore, it is crucial for the Canadian dollar to maintain its stability to the U.S dollar so that it does have an effect on the trading activities. A higher Canadian dollar means that Canadian producers can produce at lower prices favouring its competitiveness.

A lower rate of the Canadian currency to the United States dollar increases production cost disadvantaging Canadian producer’s competitiveness. The Canadian currency is commonly referred to as petro-dollar because of the influence that oil prices have on the currency. Most nations prefer to trade using the Canadian dollar; because of its ease on the international, foreign exchange, and its relationship with the United States dollar (Kozak, & Staskow, 2011). Effects of the Foreign Exchange