Canada's dollar looks set to climb back up above its US counterpart in coming months, helped by optimism about a recovering domestic economy, rising commodity prices and the weakness of the US currency. But the flight above parity with the US dollar may not last long, because a strong domestic currency will only make it harder for Canada to compete on the world stage.
A Canadian dollar rally would cool growth and dampen inflation pressures, prompting the central bank to keep interest rates lower for longer. That cuts the currency's allure for international investors and reduces its scope to soar. "The object is for the Canadian dollar not to trade higher than parity against the US dollar," said Michael Woolfolk, senior currency strategist at Bank of New York Mellon, describing a rate of one Canadian dollar to one US one as a "line in the sand" for the Bank of Canada. He sees the Canadian dollar at C$1.02 to the US dollar by the end of the first quarter, only a notch above current levels. By mid year it will rise to parity, and it will slide back to C$1.10 to the US dollar by the end of 2010, he said.
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