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Why a strong Canadian dollar isn’t an excuse to indulge in ‘retail therapy’

The Canadian dollar has come a long way in the past year and its trajectory places it among the strongest currencies of 2021.

It has been trading above 81 cents relative to the greenback for seven days in a row, and currency analysts say it could climb further in coming months.

The loonie had plunged to 70 cents US at the onset of the pandemic, when fearful investors piled into the perceived safety of the greenback. And commodity prices collapsed. But things are different now.

As the uneven global recovery begins — with Asian economies at the forefront and China leading the charge — demand for commodities has spiked along with prices for metals, energy and forestry products. This commodity boom has helped lift Canada’s currency to three-year highs.

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However, personal finance expert Melissa Leong warns shoppers not to get carried away by a strengthening Canadian dollar. Restrictions have fuelled e-commerce but she says the loonie at these levels doesn’t offset extra fees for foreign transactions that consumers may pay for goods from the U.S.

“Your credit card may charge an additional 2.5 per cent on top of the exchange rate. It may be more if you’re using a service such as a PayPal. Take that into consideration when you’re buying something,” she told Global News.

Leong, who is the author of the Happy Go Money personal finance guide, suggests finding a credit card that doesn’t charge foreign transaction fees.

There may also be duties and a higher cost of shipping compared to purchasing something locally.

“See if there is something similar from Canadian retailers if it’s cheaper,” Leong said.

She cautions against “indulging in retail therapy during the pandemic,” and using a high dollar as an “excuse” to buy things that will derail you from your financial goals. “Take a breath, make a list of priorities for your money to keep things in perspective.”

Where the loonie goes from here

The Canadian economy has been stronger than Bay Street analysts expected to start the year, which has helped fuel the loonie.

Friday’s snapshot from Statistics Canada shows that gross domestic product (GDP) grew 0.4 per cent in February, marking the 11th month of expansion in a row.

And recent economic momentum prompted the Bank of Canada to suggest last week that it could raise rock-bottom interest rates as early as 2022.

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“That’s quite significant because that sent a signal to investors that Canada’s economy is getting back on its feet,” said SIA Wealth Management Chief Market Strategist Colin Cieszynski. “We don’t need the panic emergency stimulus that we needed a year ago,” he told Global news. “Meanwhile, the Federal Reserve board in the States has left their emergency asset purchase programs on full tilt.”

This divergence between the path for Canada’s central bank and its American counterpart has propelled “the locomotive that we know is the loonie” to travel “even faster” according to BMO Capital Markets Chief Economist Doug Porter.

He says the loonie still has room to run.

“I see a little bit of further upside for the currency over the next six and 12 months,” Porter told Global News. “Not a big move by any means, but I do think there is more upside for the currency. I could see it getting potentially as high as 85 cents at some point in the next six months.”

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