Canada and the US are neighbours and very ones good at that. But while they have several things in common, there are differences too. One of such is in their currency. While both countries use the dollars, it’s not the same dollar. So, is Canadian money worth more than American money?
The short answer to this is NO. Canadian dollars are worth less than American dollars. The reasons for the lower value include the low oil price, a stronger American economy, more demand for US dollars, and higher interest rates in the US.
However, Canadian money has been higher than that of America several times in the past. Read on to learn about the differences between the two currencies and whether you can spend American money in Canada.
Why is Canadian Money Less Valuable Than the US Money?
The comparable value of Canadian dollars to US dollars isn’t constant, but it’s stable. However, for the past few years, it has been worth less than that of the US. This is basically due to few reasons, which are.
1. Low Oil Prices
The plunging price of oil is a major factor behind the low value of Canadian dollars. Since oil prices started falling in 2016, the value of Canada’s money has also been reducing. With more supply than demand for oil, oil-exporting countries such as Canada suffer the consequences as the value of their currency decreases since less foreign exchange enters the country. Furthermore, since America is one of Canada’s largest oil importers, the low oil prices affect the USD/CAD exchange rates.
2. More Demand for US Dollars
One of the major factors determining any currency’s value is market forces, i.e., demand and supply. There’s more demand for US dollars than almost any other currency in the world today. This is because it’s the currency of international trade. With more people, including Canadians, trading their local currency against the US dollar, the value of American money against that of Canada continues to increase.
3. Stronger Economy
The United States economy plays a major role in the strength of its currency. The US dollars started its upward trend in 2015 due to the economy. The US government-issued bonds also generate much higher yields than Canada’s, which means more people are willing to invest in these bonds. To do this, they’ll have to buy US dollars which means more demand for the currency, further strengthening its value.
Even without government-issued bonds, the United States has a stronger economy than Canada. In terms of production, it’s a much bigger producer and exporter, which means more exports than Canada. Apart from Oil, Canada’s largest exports are vehicles, consumer goods, and mineral products. Other countries, including the US, also produce these things in abundance. Thus, the demand for Canadian products is much lower,
4. High-Interest Rate
Interest rate also plays a significant role in the comparative value of USD and CAD. This is because the Federal Reserves offer higher interest rates on bonds and securities. Such rates have helped the US dollar to appreciate. Compared to this, Canada has had a relatively low-interest rate over time which doesn’t help its foreign exchange rates.
The high-interest rate also encourages more foreign capital as lenders are more willing to spend. Thus, more foreign capital will increase the foreign exchange. So, if Canada is to improve the value of Canadian dollars compared with that of the US, it’ll need to increase its prime lending rate. This’ll encourage investors to buy Canadian securities, which will mean more demand for CAD than it currently enjoys. More demand will mean more willingness from investors as they’ll see the potentials of the Canadian dollar’s future performance.
Comparative Value of CAD and USD
Although Canadian money is worth less than that of the US presently, it wasn’t always so. Canadian dollars have been worth more than that of the US on many occasions. For example, on July 11, 1864, CAD had its highest comparative value against the US dollar when 1 CAD was worth 2.78 USD. This happened after the US abandoned the gold standard temporarily.
In the 1970s, Canadian dollars also appreciated and were worth more than American money. It peaked at 1 CAD to USD1.0443 in April 1974. It was also on par with USD on September 20, 2007, the first time such would happen in over 30 years. This was largely due to the rising price of oil at this time. Nevertheless, it went on to top the US dollars later that year.
Historical data shows that the rise in the value of Canadian dollars usually happens when the oil prices are on the rise. Between 2009 and 2011, the value of Canadian dollars increased largely due to the rising energy prices. From being worth 78 cents in 2009, it reached 1.05 US dollars in 2011. Since then, the value of Canadian dollars has been lower than that of the US.
There were times when the value of Canadian money and US money was the same. For example, from the beginning of the Second World War till 1950 and from 1962 to 1970, the value was the same as that of the US. This was largely due to the Bank of Canada maintaining the exchange rate. However, that’s no longer the case, which explains the value now alternates.
Can You Spend American money in Canada?
While Canada and the US might be close neighbours with strong relations, Canadian dollars aren’t acceptable in the US. The same thing goes for American money in Canada. The Canadian Currency Act stipulates that the Canadian dollar is the only official currency of the country, and all accounts funded or maintained in the country must be in CAD. However, you’ll still find few places that’ll accept US dollars for cash payments in Canada. But this isn’t guaranteed, so it’s always better to exchange your US dollars into Canadian dollars or vice versa, depending on which of the countries you’re going to.
The US dollars are more valuable than Canadian dollars. This wasn’t always so but happened due to various reasons that affect the exchange rate. However, the disparity between the two currencies isn’t that much.