With strong economic growth and the Bank of Canada set to raise interest rates, Canadians can expect to see the Loonie match the greenback by the end of 2007.

Some of the key factors that are expected to drive the dollar’s increase are a national jobless rate that is at a 30 year low combined with strong markets and a capital infusion from mergers and acquisition (M&A) deals.

"Between red-hot commodity and energy markets and huge capital inflows associated with an avalanche of M&A deals, the Canadian currency has plenty of octane left to take a concerted run toward parity against the greenback and hold it into at least the first quarter of 2008," says Jeff Rubin, Chief Strategist and Chief Economist at CIBC World Markets.

Rubin notes that the Bank will likely welcome a further rise in the Canadian dollar.

"The Bank has already indicated that it expects to raise interest rates shortly. How much rates will actually raise remains to be seen. With the Fed still likely to cut rates in Q4, we now expect the Canadian dollar to climb to parity with the U.S. dollar by year-end and remain in that range over the first half of 2008."

At this time five years ago the Loonie was at just over 65 cents US. According to XE.com currency site, it has seen a steady climb ever since. This is expected to have both positive and negative implications on the Canadian economy.

“Both Ontario and Canada are ultimately better off because they are wealthier relative to the rest of the world, with a higher dollar. However, the dollar has appreciated so rapidly that Ontario's industry has taken the most casualties in adjusting to having to compete with a higher dollar,” said Robin Eaglesham, economist and certified financial accountant for Meridian Credit Union. “Western Canada's commodity boom is not bothered by the rise in the dollar since the price increases in commodities have more than offset the currency losses since most commodities are priced in US funds.”

Eaglesham adds that it is a good thing in the long run for the Loonie to be high, because it was never a good idea to devalue the currently into prosperity. Also the sudden increase has given many companies little time to adjust.

“Certainly the higher dollar will act as a drag on Ontario growth for the remainder of 2007. However the Bank of Canada is not going to step in. The Bank realizes that a higher dollar helps lower inflation and will also force Canadian industry to get more productive (competitive),” said Eaglesham.

Whether the Loonie does manage to get on par with the greenback, many businesses in Canada must still be prepared for the pros and the cons.

“Canadian exporters and manufacturers must have a continued drive for efficiency, create further job cuts in manufacturing, and put pressure on their suppliers to lower costs,” said Eaglesham. “Some may be forced to relocate operations which cannot compete and others will take advantage of the higher dollar to import equipment and software to improve their existing operations.”

If you enjoyed this article, be sure to visit CanadaOne's article knowledge base for more informative articles.