A part of the global floating exchange system, the Canadian dollar is affected by the exchange rate in which one currency is exchanged for another, says Mapleleafweb. Several factors affect the value of the Canadian dollar in this system, including the health of the Canadian economy and international investment.Continue Reading
The level of business activity in the Canadian economy relative to activity in other national economies has an effect on the supply and demand of the Canadian dollar and its exchange rate in the floating market, according to Mapleleafweb. When business activity increases, the value of the Canadian dollar rises because there is more demand for it. When the demand for the Canadian dollar decreases in a slower economy, if its supply is not controlled, the rate can decrease in turn. The investments of foreign businesses in Canadian businesses or enterprises creates a similar high demand for the Canadian dollar, because the businesses must first convert their own funds into Canadian dollars before investing. Such a high demand also increases the value of the Canadian dollar.
The Canadian government's monetary policy as executed through the Bank of Canada also often has a significant effect on the exchange rate of the Canadian dollar. The national bank has the authority not only to control the supply of new dollars but also controls interest rates, which affect the economy greatly and thus the value of the Canadian dollar.Learn more about Currency & Conversions