Our analysis of exchange rate fluctuations indicates that major movements in the dollar are largely driven by the market forces theory would predict, namely movements in commodity prices and in interest rate differentials.2 Fortunately, deep and liquid financial markets have developed to help Canadian trading firms manage at low cost the risk associated with such volatility.
In order to contain the impact of the crisis on the real economy and preserve price stability, central banks have engaged in an aggressive cutting of policy interest rates and have introduced a number of non-standard monetary policy measures.