The Canadian dollar will continue to gain back ground against the U.S. greenback through next year, RBC Financial Group economists said in their latest quarterly forecast.
RBC said the loonie is expected to hit 69 cents US by the end of this year and continue rising to 71.4 cents US by the end of 2003.
"Some of the missing pieces behind the Canadian dollar puzzle falling commodity prices, poor productivity rates relative to the U.S. and lower short-term interest rates have now joined the oft-cited positive fundamentals at the precise time when the fundamentals underpinning the U.S. dollar are starting to crumble," Craig Wright, RBC's chief economist, said in the forecast.
The Canadian dollar was worth 65.32 cents US in foreign exchange trading on Wednesday.
In addition to forecasting a strong rise in the dollar, RBC also predicted good things ahead for the Canadian economy.
Growth will hit 3.7 per cent in 2002 and 4.1 per cent in 2003, outstripping the 2.6 per cent and 3.3 per cent forecast for U.S. economic growth in the same respective years.
"We're seeing the most favourable environment in years and it has allowed demand accumulated during some leaner years in the 1990s to start bubbling to the surface," Wright said. "This has boosted consumer spending and will keep the Bank of Canada moving aggressively on rate hikes relative to the Federal Reserve."
While the Fed has held the line on interest rates as the U.S. economy struggles to get on track, the Bank of Canada has already boosted rates twice for a total of 0.5 of a percentage point.
"The U.S. Fed kept consumers spending during the slowdown when spending on large tickets items usually comes under pressure keeping the recession short and shallow. But now the well's run dry. The U.S. recovery is unlikely to be as vigorous as that found following a typical recession when consumers hit the stores hard," Wright said.
Canadian consumers appear set to spend heartily again, while U.S. consumers are beginning to tighten their pursue strings, he said.
Meanwhile, businesses investment spending, inventory accumulation and international trade on both sides of the Canada-U.S. border are set to broaden and strengthen the pace of economic growth this year and next, Wright added.