Indeed, the reason behind a movement in the Canadian dollar can be just as important for monetary policy as the movement itself. Let me take a couple of minutes to explain. First, consider the type of currency movement that reflects changes in foreign demand. In 2003 and much of 2004, we saw a strong increase in the value of the Canadian dollar.
This reflected, at least in part, the strong demand for Canadian exports, and a sharp rise in the global prices of many of these exports, particularly commodities. The stronger Canadian dollar, in turn, encouraged imports and discouraged exports. This is an example of how the appreciation of the Canadian dollar can work to dampen an initial increase in aggregate demand.