The Canadian Dollar has undergone a significant depreciation over the past 10 years. The drop in relative value of our currency has caused a great deal of consternation not only among economists but also in the media and consequently the general public has well. Ordinary citizens experience first hand the effects of such depreciation every time they go to our most frequented vacation spot, the United States. While economic variables are not usually the subject of casual debate, the exchange rate trend has even permeated our most beloved conversation topic, professional hockey. Despite the popularity of the subject, consensus and clarity are rarities. What has happened to the value of the Canadian dollar simply requires quick glance at the data, however why it has happened is rather more contentious. This paper will analyze the long term effect of the Canadian exchange rate relative to the US dollar. The first section will serve as a background piece on exchange rates. In the next section, I hope to provide the reader with an appreciation of what has happened to the value of the Canadian dollar over the last decade. In the third part I will go through the economic theory behind the determination of a long term exchange rate. Finally in the fourth section, I will try to relate the theory with the trend exibited by the Canadian dollar. While the subject is often discussed, there still exists many misconceptions about what the exchange rate actually is. The exchange rate is the price of a foreign currency in Canadian dollars on the foreign exchange market. Like in any market, the price is determined by the intersections of demand and supply. Demand for a currency is made up of all those who want to buy or hold an asset in that particular currency. For example, importers need to convert the Canadian dollars into foreign currency in order to purchase foreign goods. Similarly investors who wish to hold foreign assets must pay ...
