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Wednesday, March 01, 2006

The loonie vaulted to its highest level in more than 14 years yesterday, welcome news for Canadian travellers on the eve of March break, after reports this week showing buoyant economic growth and a record surplus in trade and international investment flows.

The Canadian dollar broke 88 cents (U.S.) for the first time since December, 1991, touching 88.06 cents before closing at 87.98 cents. Economists expect the rally to continue and many see the dollar reaching the low 90s later this year.

The move may spur some Canadians to finally book that flight this year. Those already booked will surely get more bang for their buck once they arrive in Florida or the Dominican Republic. A $10 (U.S.) order of enchiladas abroad, say, now costs just $11 (Canadian). Three years ago, it was almost $15.

The strong dollar "is always an encouragement for people to actually take that trip they've thought about because it makes it more affordable," said Gillian Bentley, spokeswoman for WestJet Airlines Ltd. in Calgary.

The reasons for the rise? A resilient economy, a swelling surplus and the prospect of higher interest rates, to name just a few.

A report yesterday showed the economy expanded by a stronger-than-expected 0.4 per cent in December, twice the rate of November's growth.

The dollar had already jumped a day earlier on news the current account surplus swelled to a record $13.28-billion in the fourth quarter.

The surging dollar has led to manufacturing job losses, but the economy has proven it can withstand the trade challenges posed by the increase. In fact, an energy-led boom in exports has made the Canadian economy one of the Western world's hottest, according to a new measure of economic growth called "command" gross domestic product. The measure, which captures the effects of "terms of trade" improvements and their impact on the purchasing power of households and businesses, shows command GDP has been growing in Canada since early 2002 at a rate 1.4 times faster than in the U.S. and more than triple that of the EC and Japan.

The strength of the economy has cemented expectations that the Bank of Canada will raise interest rates on Tuesday to cool an economy that's running at full capacity. The central bank has already raised rates four times in a row, bringing the key lending rate to 3.5 per cent.

Consumer spending powered Canada's economy last year, and an expected boost in business investment this year means the economy isn't likely to lose steam soon -- more good news for the currency.

While that's a boon for Canadian travellers, it spells more woe for Canada's manufacturing industry, which bled more than 100,000 job losses last year alone.

Indeed, the dollar's rise could well stop the central bank in its tracks, said Sal Guatieri, senior economist at the Bank of Montreal in Toronto.

"Certainly if the Canadian dollar rose to 95 cents or parity, for no fundamental reason (meaning it's not driven higher by rising commodity prices), that would have a huge negative impact on our economy and almost certainly the Bank of Canada would need to lower interest rates," he said.

"At some point, a higher Canadian dollar will strangle the Canadian economy, but who knows what that point is," he added.

Yet, buried in the largely buoyant report yesterday were signs that the loonie's gains are a mixed blessing: investment in machinery and equipment had its best performance in eight years, while import prices tumbled 10 per cent -- a key reason inflation didn't pick up last year despite higher energy prices.

For companies such as automakers, which import vehicle parts from the U.S., the higher Canadian dollar helps them offset rising energy and labour costs.

The question now being, is there a level where Canadian firms simply can't compete? How high is too high?

"It's impossible to measure," said Andrew Pyle, a senior economist for Scotia Capital Markets Inc. "But we're definitely toying with it now."

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