After hitting a 20-month high last week, the loonie continued to rise in Tuesday trading, bolstering expectations that it will soon reach parity with its American counterpart.
The Canadian dollar closed at 98.62 cents U.S. That's nearly half a cent higher than its Friday close of 98.2 cents U.S., which was its highest level against the greenback since July 2008.
The loonie rose on Tuesday following an announcement by the U.S. Federal Reserve that interest rates south of the border will remain historically low for an "extended period," or at least six more months according to many economists.
The possibility of diverging Canadian and American interest rates has helped boost the loonie in recent months.
Analysts expect the Bank of Canada will raise rates by as much as a full point later this year, while U.S. rates are expected to rise more slowly due to a weaker American economy.
"We think that they will continue holding on to (that) language for some time to come," said Meny Grauman, senior economist at CIBC World Markets. "We think that the Fed will only start to raise rates early in 2011, so that gives us a few more meetings where we expect that language to remain on hold."
BNN's Pat Bolland said the loonie's surge reflects a growing gap in the performance of the two economies.
"It's incredible to see the kind of movement we've seen in the Canadian economy compared to the United States," Bolland told Â鶹´«Ã½ Channel on Tuesday afternoon.
"We think about them as our biggest trading partner, and here they are still wallowing through their housing problems," he said. "We're accelerating, if anything, and that's being proven both in the currency and the stock markets."
The last time the loonie hit parity with the greenback was May 2008. But experts say that could happen again as early as this week.
The February Consumer Price Index could provide the turning point, which Statistics Canada will release on Thursday morning. A higher than expected inflation rate could put pressure on the central bank to boost interest rates.
According to a Conference Board of Canada report released on Monday, the rising Canadian dollar may not be as bad as expected for the country's manufacturers.
The board says the manufacturing industry has internationalized much of its operations to protect against currency fluctuations.
The most vulnerable industries according to the report are transportation and warehousing, retail and information and cultural sectors.
With files from The Canadian Press
