Four years after it hit an all-time low, the Canadian dollar in 2006 was riding a steady escalator up. Since January 2002, the once-lowly loonie has gained more than 40 per cent against the currency it's most concerned with – the American dollar.

By May 2006, the dollar had broken through the 90-cent US level - its highest rate since 1978. Despite rising all the way from its all-time low of 62 cents US in early 2002, many economists are saying there's still room for the loonie to keep rising.

Look for 92 to 95 cents US by later 2006, some say. And several analysts are calling for the loonie to reach parity with its U.S counterpart by 2007 – something that hasn't happened since 1976.

So what's behind the buck's run-up? Well, there are several reasons and Washington holds the key to some of them.

The Canadian dollar is constantly being measured against its U.S. counterpart because Canada and the U.S. are neighbours and form the world's largest trading partnership.

The loonie's been flying in large part because the U.S. economy has been struggling to get off the ground. Washington is facing budget and trade deficits that have never been higher. In 2005, the U.S. bought $723.6 billion more in foreign goods and services than it sold, registering yet another record annual trade deficit.

To pay for those imports – including huge amounts of oil, gas, cars and car parts, lumber and numerous other products from Canada – U.S. consumers in effect have to buy them with foreign currencies. To do that, they have to sell U.S. dollars in international money markets. As in any market, the unending supply has pushed the price of the greenback down, as measured in other currencies.

For several years, American sales of U.S. dollars didn't have much effect on the price of the Canadian dollar, but that started to change in 2003. The greenback fell 22 per cent against the loonie during the year – and fell almost exactly the same amount against the euro.

Boosting the loonie

There are other factors that influence the dollar.

While the international flight from the U.S. dollar to other currencies affects that currency, Canada's economic performance plays a big role in boosting the loonie. Canada's jobless rate was at a 32-year low of 6.3 per cent in early 2006, as more than 330,000 jobs had been created in the previous year. Growth in GDP was running at more than 3 per cent.

The Bank of Canada has noticed that growth and has been responding accordingly. Since mid-2004, it has doubled its key lending rate to help keep a lid on inflation. And with the central bank forecasting that the economy would operate slightly above its production capacity through to 2008, it warned that further modest rate hikes are likely.

With the U.S. Federal Reserve signalling that its long rate hike campaign was near an end, language like that has made the Canadian dollar a relatively more attractive destination for foreign capital.

Another factor that has helped to push up the Canadian dollar is rising commodity prices – especially a run-up in the price of oil. As a net exporter of oil, Canada is seen as benefiting overall from record oil prices.

But it's not just oil. Canada exports huge amounts of nickel, copper, aluminum and zinc. All of these commodities are at or near record highs. With commodities accounting for 35 per cent of Canada's exports, the loonie is seen around the world as a "commodity-based currency," and has been bid up accordingly.

Winners and losers

When the loonie has a big move in either direction, some of the effects are instantly obvious.

When it gains ground against the U.S. dollar, for example, Canadian exporters lose ground because their products become more expensive for U.S. buyers. It's simply harder to compete.

Since 2002, Statistics Canada says 189,000 manufacturing jobs have disappeared in Canada. The agency places the blame squarely on the soaring loonie.

But some economists say the difficulties of adjusting to a higher loonie will help exporters in the long run, because they've had to take measures to improve efficiency. The days of relying on a cheap loonie to help them sell in the U.S. are long gone.

Cheaper U.S. dollars also provide Canadian companies with an opportunity to invest in U.S.-made tools that make them more competitive. Much of the software and machinery Canadian companies buy to run their operations are bought from the U.S. A more favourable exchange rate means those companies can invest more in those tools of efficiency.

For some companies, including those that have been reporting weaker American sales because of the loonie's gains, there can be yet another silver lining. As the Canadian dollar rises, the cost of repaying U.S. dollar debt falls. Many Canadian companies have debt that is denominated in U.S. dollars. Those debt payments become cheaper when the American dollar falls.

Snowbirds and other Canadian visitors to the U.S. are finding that their money goes much further these days. In 2002, Canadians had to pay $1.62 for each U.S. dollar they bought. In 2006, those U.S. dollars were costing just $1.12 each.

Conversely, U.S. visitors to Canada are finding that their money is buying less than it used to. In early 2006, Statistics Canada reported the number of same-day cross-border vehicle trips made by Americans to Canada fell to their lowest level on record.