As I’ve said before, there is a loose but predictable relationship between oil prices and our currency – like a dog and its master, when connected by one of those leashes that stretch and rewind. But let’s just suppose we had tried to stop the Canadian dollar from rising once it reached around 85 cents, sometime in 2005.
The obvious way to limit the rise in the dollar would have been for the Bank to cut interest rates. Given the underlying upward pressure on the dollar coming from rising oil prices, we estimate that holding the loonie at around 85 cents back in 2005 would have required cutting interest rates from 4 per cent to almost zero.