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Should we cheer when the dollar rises? That depends on why it's rising and whose interests we are concerned with. It is a typical economic question — and there is no single answer.

Foreign exchange markets are like any other — prices depend on the forces of supply and demand. Foreigners demand Canadian dollars when they want to buy something in Canada - goods and services (our exports), assets such as oceanfront property, stocks or bonds. Canadians supply foreign currencies when we want to buy foreigners' exports or assets.

Let's assume Canadians are not changing their interest in foreign goods and services or assets — the rising dollar is then a function of changes in the foreign demand for them.

In the current situation, demand for our energy resource exports is an important source of the demand for Canadian dollars. With rising world oil prices, our oil now costs much more to buy. Foreigners must demand more Canadian dollars, driving the exchange rate up — they have to exchange more of their currency to buy the necessary Canadian dollars.

Other forces will drive up the Canadian exchange rate, for example if foreigners have an increased interest in owning Canadian land; if the Bank of Canada raises interest rates so that our bonds are a more attractive investment; or if speculators think the Canadian dollar will rise or their own currency will fall. All of these have happened in the past.

Two cheers for the rising dollar?

The reason for the rising dollar influences its impact and who is affected. The energy boom is not only driving the dollar up but pushing the Alberta economy very quickly, about three times faster than the entire Canadian economy. Alberta exports more energy and sells it at much higher prices, in terms of both the U.S. and the Canadian dollar. The energy companies' profits rise and employment in the energy and related industries expands rapidly.

Exporters outside Alberta and the energy and resource sectors are having a tougher time because of the higher Canadian dollar. Their exports cost foreigners more, sales revenues fall, and they may be cutting back employment - people are losing their jobs and take time to find new ones, even when the economy is growing rapidly. The skills of a fish plant worker from Nova Scotia cannot be immediately converted into the skills demanded in the oil patch. A similar issue rises for industries which compete with imports - the higher dollar makes foreign goods more attractive.

Dutch disease:  The deindustrialization of a nation's economy that occurs when the discovery of a natural resource raises the value of that nation's currency, making manufactured goods less competitive with other nations, increasing imports and decreasing exports. The term originated in Holland after the discovery of North Sea gas.

Thus Canada is suffering from "Dutch disease" — rapidly expanding exports of some raw materials drive up our exchange rate and this shrinks other parts of the economy. If the resource is non-renewable, when it runs out there may no longer be a place in the market for the firms or industries damaged by the high currency. Further, during the boom, there is no guarantee the jobs created in the expanding sectors equal those lost in declining industries.

There is also a differential impact depending on whether you are an exporter or importer. When the dollar is higher, foreign goods become cheaper. Firms can invest in foreign equipment at a lower cost and bring down their production costs — in the long run. Consumers have an immediate benefit to the extent that firms, say supermarkets, pass on their savings from buying imported foods at a lower cost in Canadian dollars. But getting your vegetables 15 per cent cheaper in February is cold comfort to someone who is unemployed because of the higher dollar.

Thus the high exchange rate affects industries and regions differently and even booming areas may find that success is costly. The export boom gives and it takes away, but from different people.

The impact of a high dollar is worse if caused by the Bank of Canada raising interest rates or by foreign investors acquiring Canadian firms. This demand for Canadian dollars is not complemented by an increased demand for our exports, so there is no employment impact from the funds flowing into Canada as there is with an export boom. Indeed, there could quickly be job losses, as the new foreign owner "rationalizes" their operations, which means laying off some of their employees in Canada.

The effects are similar when there is land-sale boom, with foreigners buying Canadian properties. They drive up the Canadian dollar and hurt our exports and employment in the affected companies and industries, but they also drive up land values within a community and, as we know in coastal communities, affect property values and taxes.

A higher dollar is a two-edged sword and how you view it depends on whether you are wielding it or defending yourself from it. 

Michael Bradfield retired this year from мÓÆÂÁùºÏ²Ê¿ª½±Ö±²¥'s Department of Economics. He is the 2006-07 winner of the Faculty of Science Award for Excellence in Teaching.