At the end of its first week of trade for the new year the Canadian dollar was buying about US$1.01, 78 euro cents and 65 British pence -- all stronger than average levels. But what is driving this strength in the loonie?
Canada's economic strength compared with the rest of the world has attracted a lot of private investment in Canadian denominated assets. But Avery Shenfeld, chief economist at CIBC, says there is more to the high exchange rate than meets the eye. Mr Shenfeld says central banks around the world are also very interested in Canadian dollars in a bid to diversify their assets at a time when the U.S. dollar has lost purchasing power. This additional demand for the loonie may be overheating its value and crippling the Bank of Canada's ability to raise interest rates and curb rising consumer debt levels.