Canadian Dollar Depreciation
Canada has been increasing its prestige as a high-tech, industrial, society
since the end of World War II. In many ways it resembles very closely its
southern North American cousin, the United States. Some of those similarities
are residing in its market-orientated system, pattern of production, and its
high standard of living. Most years following the war up to the present, Canada
has experienced some kind of continued growth as a prosperous and developed
country. However, during the year of 1998, Canada experienced an unexpected
large depreciation in their dollar relative to the United States. Late in August
of that year, in fact, the value reached an all-time low. During this paper, I
will try to present some of the possible economic factors that may or may not
have led to this change in Canadaís exchange rate. I will also examine some
additional analysis and theories as to why the trend possibly occurred. Exchange

Rate As the year 1998 approached, the trend for the Canadian dollar was on a
steady decrease in value in relation to the U.S. dollar. With each passing year
the dollar lost some value as the table below demonstrates. Year 1990 1995 1996

1997 1998 Exchange Rate 1.16 1.38 1.36 1.38 1.48 *All data tables extrapolated
from the Cambridge Forecasts Country Report, unless otherwise noted. It took an
exceptional hit during the year, moving the rate from 1.38 U.S. dollars to 1.48
in U.S. dollars. The plunge is better exhibited in Appendix 1, with the sharp
decrease of the dollar illustrated graphically and more specifically, with

Appendix 2 showing the drop throughout the year of 1998 alone. Growth Rate In
terms of growth rate, the years leading up to the exchange rate drop in 1998
showed very typical numbers. There was nothing out of the ordinary, or anything
to hint at a sharp decrease in the value of the Canadian dollar. As highlighted
below, up to 1998, the economy was growing at a slow but steady rate each year.

Both the Total Gross Domestic Product and percentage of GDP real growth were
increasing overall. Year 1990 1995 1996 1997 1998 GDP (bill. of U.S. $) 573966

584044 611602 631193 603978 Year 1990 1995 1996 1997 1998 GDP Real Growth (%)

N/A 2.3 1.6 3.7 3.1 However as the numbers for 1998 indicate, the depreciation
of the dollar definitely took a significant chunk out of the Total Gross

Domestic Product, dropping it below 1996ís levels. This is to be expected as a
depreciated currency would effect the value of the products, however as pointed
out before, nothing in growth rate eluded to the depreciation that took place in

1998. Inflation Rate Similar to the growth rate, the inflation rate also had
nothing to offer in terms of an indication of the lowering exchange rate. In
fact, as highlighted below, the inflation rate was steadily declining as 1998
approached. A trend usually linked to a healthy economy overall. Year 1990 1995

1996 1997 1998 Consumer Price Inflation N/A 2.2 1.5 1.6 1.0 Even the figures
from 1998 indicate, the inflation rate seemed to be unaffected by the
depreciation of the Canadian currency. "...that (increase in) performance (of

Canadian companies), is due almost entirely to the depreciation of the currency
and, to a much lesser extent, to the lower inflation that Canada has experienced
during the last decade..." Therefore using the inflation rate as an economic
indicator in this case is not always conclusive to the ideal that the dollar
should have been in good shape, with a thriving economy. Dollar Reserves Again,
looking at the numbers of dollar reserves, no significant trend seems to point
in the direction of increased weakening. Year 1994 1995 1996 1997 1998 Dollar

Reserves (mil of U.S. $) 392 -2710 -5498 2392 N/A The fluctuations in the
numbers seem to be quite normal and constant throughout Canadaís time of both
economic prosperity and slowdown. Trade Balance The trade balance however starts
to show a different story. The numbers up to 1997 look very healthy with the
amount of exports far outweighing the imports. 1997 spelled a big decrease in
the trade balance and the numbers from 1998 show much of the same. Year 1994

1995 1996 1997 1998 Exports (mil of U.S. $) 228,167.10 265,333.90 279,891.80

301,381.40 322,262.40 Imports (mil of U.S. $) 207872.50 229936.50 237917.20

277707.80 303399.70 Trade Balance 20294.60 35397.40 41974.60 23673.60 18862.70
*Data extrapolated from CANISM, Statistics Canadaís online statistical
database But as Appendix 1 indicates, 1997 was the beginning of the gradual
decent of the Canadian dollar, until it reached itís low in August of 1998.

This translates to