Dollar, Canada's currency, or Money. As money, it is the measure of value in which all prices are expressed. However, the term "Canadian dollar" is also used to relate the value of our currency to another country's currency through the Exchange Rate. Under the current, flexible exchange rate system, the value of the Canadian dollar is continuously determined by trading in the foreign exchange market. Trading is mostly carried out by Chartered Banks and large corporations and is centered in Toronto, Montréal and New York.

From day to day, the value of the Canadian dollar is affected by news of important economic events, changes in expectations about Canada's economic prospects and government actions. Over longer periods, the dollar's value is related to the cost of Canadian goods relative to comparable foreign goods. When Canadian prices rise (Inflation) faster than foreign prices, the dollar's value falls relative to foreign currencies. If Canadian prices rise more slowly than foreign prices, the dollar's value rises.

The value of the dollar is important to Canadians for 2 reasons. First, because Canada is a trading nation, changes in the value of our currency affect the prices of the goods we sell to foreigners as well as those we buy from them. As the value of the Canadian dollar rises, our exports become more expensive, reducing foreign demand and causing domestic Unemployment. The Canadian prices of imported goods are reduced, reducing the rate of inflation.

When the value of the Canadian dollar falls, foreigners demand more of our exports, reducing unemployment. The prices of imported goods rise, raising the rate of inflation. The second reason is that changes in the value of the Canadian dollar affect Canadians' financial dealings (both as lenders and borrowers) with foreigners. A rise in the value of the Canadian dollar reduces the cost of paying foreign loans and the return on Canadians' investments abroad. A fall in the dollar's value has the opposite effect.

The government affects the value of the Canadian dollar in 2 ways. By buying or selling Canadian dollars in the market (called foreign exchange market intervention), the government can change the value of the Canadian dollar over short periods. A more long-lasting effect can be achieved by using Monetary Policy. In this case the government modifies Canadian interest rates, changing the attractiveness of investing in Canada. This, in turn, affects the demand for, and ultimately the value of, the Canadian dollar.