How is the Canadian Dollar Value Determined?

The Canadian dollar’s value relevant to the other international currencies plays a major role on the political and economic situation of a country. However, the price of the Canadian dollar is determined by the government and other financial parties that take part in this process. The currency value depends on business activity, level of investment, monetary policy of the state and interest rates.

Business Activity

The most impactful forces which affect the demand and supply of the Canadian dollar are the business activities of the economy. A change in the level of the activity in comparison with other economies can have an effect on the supply-demand curves and in return the value of the currency. An increase in business activity through a rise in operating businesses, larger employment rates or increased sales, the demand for the dollar also increases to help cater to the higher activity level. If the supply is kept constant, the dollar price relative to foreign currencies may rise.  Similarly a decrease in the level of business activity will decrease the Canadian dollar demand and keeping the supply constant, the value of the dollar in terms of other currencies may decrease as well.

International Investment

Another factor which is closely linked to the value of the Canadian dollar is the number of investments coming in and going out. Investments are made every day through the purchase of stocks, bonds, imports and other activities. A change in the flow of the investment between Canada and another country will affect the value of the Canadian dollar due to changes in demand and supply.

Monetary Policy

The Canadian government has implemented a floating exchange system but it also steps in during transition periods. The government regularly interferes in the process through direct or indirect actions. It influences the demand and supply of the Canadian dollar through monetary policy. The policies influence the exchange market and affect the price of the Canadian dollar in terms of foreign currencies.

Interest Rates

The interest rates also affect the value of the Canadian dollar. These rates are the amounts a lender charges for lending money. If the interest rates in Canada are higher than another country’s then the lender can gain larger profits from lending out money in Canada. They are likely to take advantage of this rate of return by shifting the portfolio towards Canadian bonds.


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