The Loonie Takes Off in Canada

The day the Canadian dollar hit its all-time high was not, in fact, Nov. 7, 2007. The pinnacle came more than 140 years earlier, when Confederate troops reached the outskirts of Washington, D.C., forcing Union soldiers to decamp from Virginia and defend their capital. The Canadian dollar that day was worth $2.78 U.S.

It may seem, then, that the loonie’s $1.10 U.S. mark in November — merely its peak in generations — should not have elicited quite the cheers and fears it did across the country. Canadians, of course, are peculiarly obsessed with the U.S. dollar exchange rate: three-quarters of exports go to the U.S. and a comparable share of imports arrive from there. But America’s Civil War is a reminder, if nothing else, that when currencies start breaking records, it’s usually a sign that something big is happening.

And something big was happening in Canada in 2007. The economy boomed even as that of its southern neighbor showed signs of cooling. The engines of Canadian growth are shifting from the traditional heartland, Ontario and Quebec, to the resource-rich regions of the West and Newfoundland. In 2007, some Canadians won. Some lost. Or, as the Canadian Press put it in September: “High Loonie Is Bad for Canadian Pigs, Good for American Lettuce.”

So for the heights the loonie reached, for the economic upheaval (both good and bad) it brought, and for the rare bird’s-eye view that Canada got, looking down on its best friend and biggest rival in the world — where, let us not forget, people rarely fail to find the term loonie hilarious to begin with — the lofty loonie is TIME’s Canadian Newsmaker of the Year.

The common loon, a black and white water bird with a tapered bill and a haunting call, became a symbol of Canada’s money in 1987: the year Canada minted its first one-dollar coins with the now-iconic bird on one face. It is a fitting national emblem. The loon is found across much of the country, and moves impressively both in air and under water. Its aquatic skills in particular are so good that outside North America, the bird is known as the great northern diver.

Canada’s currency did dive after the dollar coin was introduced — all through the 1990s and into the early part of this century. January 2002 was the bottom. At it’s all-time low then, the Canadian dollar was worth just less than 62 U.S. cents. Recovery since then, dramatic and steady, began with something as dull as a rise in oil prices. With that, the laborious process of drawing viscous bitumen out of Alberta’s oil sands became ever more viable. Massive shovels churned the earth, digging up the tons of sand needed to produce each barrel of oil. New pipelines were laid. Alberta’s already hot economy hurtled forward.

Some claim the Canadian dollar rose against the greenback because the U.S. dollar has been dragged down by government budget deficits, a long and costly war, and a yawning gap between the value of imports and exports. True enough. But the link between the loonie and the worldwide boom in commodities had even more to do with it. If you graph the value of the Canadian dollar with the prices of oil, natural gas, certain metals and grain, “it’s pretty hard to tell which is which, down to every little squiggle,” says TD Bank Financial Group chief economist Don Drummond. It’s no coincidence the loonie was at its strongest against the U.S. dollar when oil prices first shot toward $100 per bbl. That same week, the loonie posted record values for the year against every other major currency as well. One Canadian dollar was buying 14% more euros than it had at the beginning of January, 16% more pounds, and 21% more yen.

The year in change
And so with glowing hearts, Canadians saw their dollar rise — few failing to appreciate that, in some way or another, the Canadian economy was smoking its U.S. counterpart. Growth in Western Canada had been blistering for years. Construction boomed. Across the country, employment rose. Toronto Blue Jays CEO Paul Godfrey told a U.S. radio station in October that each one-cent increase in the loonie was saving him $600,000 a year in U.S.-dollar player salaries.

Ordinary Canadians benefited from cheaper imports just as those who own basaball teams did. Or they headed south. On a crisp day in December, Lorie de Luca boarded a dawn bus full of cross-border shoppers in the Toronto suburb of Brampton, Ont., bound for Boulevard Mall near Buffalo, N.Y. “I don’t shop here anymore,” she says, “not when I know I’m going to get better deals in the U.S.”

There was a downside, of course. Across from Detroit in Windsor, Ont. — at Canada’s busiest border crossing — the plumped-up loonie did not bring such good humor. Windsor is one of the few urban centers in Canada — almost all of them in Ontario — where unemployment has risen since 2002. Gurmit Singh Bains drives his taxi along the riverside. “It’s like a ghost town,” he says. “The whole economy is down: hotels, restaurants, everything.” The waterfront DaimlerChrysler Canada headquarters opened to much fanfare there in 2002, when the city’s auto-manufacturing industry was red-hot. Today, the building’s cavernous ground-floor retail space is almost empty. As the rising dollar made Canadian products more expensive around the world, Canada shed nearly 100,000 manufacturing jobs in 12 months. “We went from [being] the lowest-cost producer of vehicles around the world for GM, Ford and Chrysler to probably one of the highest,” says Buzz Hargrove, president of the Canadian Auto Workers Union.

The bad news wasn’t limited to manufacturing. Any firm that depends on U.S. customers felt the exchange-rate pinch in 2007. At tourist hubs like Niagara Falls and Whistler, businesses report fewer visitors. Americans made about half as many trips north in 2007 as they did in 2003. Natural-resource industries, for which prices haven’t risen substantially, also suffered. “In the month of November there wasn’t a single Canadian sawmill that made money,” says Russ Taylor, president of forestry consultancy International Wood Markets Group. Nova Scotia’s biggest Christmas-tree grower shipped a quarter of a million balsam firs this year, mostly to U.S. stores. Next year they’re shutting up shop in Canada altogether, says Mac Kirk at Kirk Forest Products. The strong loonie eroded all their profits. “It is loony,” Kirk says.

And how loony Canada became in 2007. Above all, it was a year of unpredictability. In October border waits were up to three and a half hours long. In Canada, there were reports of angry customers throwing books at store clerks, enraged by the stickers printed up months in advance that forced Canadians to pay up to 30% more than Americans for the same goods. On Nov. 7, the day the loonie reached $1.10 U.S., the currency’s value swerved and swung over a three-cent range in a single day — a difference that for the Blue Jays, at least, means most of the annual salary for slugger Alex Rios. “Volatile,” Bank of Canada governor-to-be Mark Carney calls the dollar fluctuations. No kidding.

Sooner or later the politicians were bound to weigh in. On Nov. 7, Stephen Harper announced he was “concerned” about the dollar’s “unprecedented” rise, an unusual Prime Ministerial foray on to Bank of Canada turf. Ontario Premier Dalton McGuinty met with the PM the next day, calling for lower interest rates and a federal contribution to a $1.1 billion jobs fund for struggling Ontario manufacturers. (Harper made no promises.) The same day, the Quebec Premier was demanding a loonie summit with all the provincial Premiers. (One is now scheduled for January). Just six weeks after the loonie achieved parity with the buck in September, Canadians still seemed disconcerted, as if something a tad unnatural had happened.

Down to earth
It didn’t last. In November, the great northern diver dipped again, bringing the dollar back below $1 U.S. Today, the major Canadian banks predict commodity prices will fall more as the U.S. economy cools, landing the loonie somewhere around 95 U.S. cents at the end of 2008. But few predict a return to the low, low loonie levels that Canadians knew just one year ago, and that means the structural shift in Canada’s economy — with growing differences between sectors and between geographic regions — seems set to continue. “It’s almost like a tale of two economies,” says Douglas Porter, deputy chief economist at BMO Capital Markets, “and I think that stark divergence will continue in 2008.”

No doubt that means there’s more bad news ahead for Canadian pigs and good news for American lettuce. Still, despite the ups and downs the dollar brought in 2007, Canada’s economy barely wavered. Along with the loonie, output, employment and Canadians’ deservedly inflated pride all flew steadily in the face of a global credit crisis. In fact, the most remarkable thing about the loonie’s ascent may be how handily Canadians handled it — notwithstanding the odd hurled book. Just imagine if in 2002 someone had prophesied today’s exchange rates. “I think we [all] would have concluded that the Canadian economy would be decimated,” says Don Drummond at TD. “We have thrived through this.” It’s a good thing, too. The loonie may be flying high for a long while to come.