The Bank of Canada holds billions of dollars in foreign currencies on behalf of the government. The Bank buys and sells these currencies to decrease or increase holdings of Canadian dollars. Learn how these transactions help to soften sharp movements in the exchange rate of our dollar.
- The Bank of Canada has a foreign currency reserve to support the Canadian dollar if needed.
- The Canadian dollar is a floating currency, meaning its value is not regulated by the government.
Ask the following questions.
Considering the animation of the house with balloons, what do you think it means when we say the Canadian dollar is a floating currency?
It is important to understand that anything a foreign purchaser buys from Canada must be done so with Canadian dollars (and vice versa). So, a high demand for Canadian products means there is a greater demand for Canadian dollars on the foreign exchange market—and the value rises. A lower demand for the dollar causes the value to drop. The currency floats.
What is the impact of a very high or very low dollar?
Some sectors of our economy benefit when the value of the dollar is high, and others benefit when the value of the dollar is low. A strong dollar is good for businesses that rely on ordering imported products or for people planning to shop in or travel to another country. A weak dollar is good for businesses that export products or that rely on foreign tourism.
When the value of the dollar shifts, one part of the economy loses while another part gains. Therefore, a dollar that floats is more beneficial to the economy as a whole than a dollar that is fixed at a specific exchange rate.
Why does the Bank of Canada store foreign currencies?
These currencies can be sold off in order to increase our holdings of Canadian currency. While a rare event, we would do this if the dollar were facing a sudden crisis that could cause its value to drop very sharply. Increased currency holdings would then cushion the dollar’s fall, so that it would not be such a shock to the economy.
What are some examples of major world currencies in reserve?
The foreign currency reserve contains roughly $100 billion of foreign currencies, mostly US dollars, euros, British pounds and Japanese yen.