TORONTO - The Canadian dollar is racing towards parity faster than even the most daring economists predicted, but the surge could have longer term effects as more manufacturers weigh whether they can afford a higher loonie and vacationers look to sunny U.S. destinations for deals.
The loonie touched a 20-month high against the U.S. greenback on Friday, briefly tapping 98.47 cents, its highest level since July 2008, on the back of an optimistic labour market report.
The currency later closed at 98.20 cents U.S., up 0.57 of a cent.
Canada's dollar has been on a steady climb for the past year, but has really picked up the pace since mid-February, rising more than three cents on stronger optimism about the economy and the prospect of higher interest rates in Canada.
For many Canadians, the rise offers plenty of new opportunities for cross-border shopping bargains and major savings on vacations, but there's also a downside.
It also makes the cost of Canadian lumber, pulp, chemicals and auto parts more expensive in the United States and hurts the prospects of Canadian exporters in their largest market.
The sudden increase in the loonie could force some companies to head back to the drawing board and Canadians drafting up new vacation plans.
Travel agent Flight Centre knows vacationers habits, and a spokeswoman for the company says that when the loonie climbs, so does the company's bookings.
"You're suddenly going to see a lot of people inquiring about Las Vegas, Disneyland and Florida - the places you can go where you don't have to have a lot of time booked off," said spokeswoman Allison Wallace in an interview.
But with March Break underway, finding a hot vacation spot might be a little harder than usual.
"We are busier than last year," Wallace said of the company's current trip bookings.
"It's hard to say right now how much of that has to do with the dollar."
For those who didn't secure a flight to a sunny destination in the United States there's always cross-border shopping, where Canadians can sometimes dig up major deals on typical household items, when compared to the price in Canada.
"You look at the back of the book for the Canadian price, and it's a joke when the dollar is almost at par," said Jennifer Cherneski, a rabid cross-border shopper.
Cherneski, 27, said she usually travels every other month to Port Huron, Mich., a border city in an industrial state that has been decimated by layoffs from the auto industry. Lately she's observed that more Canadians are parked at the local U.S. malls and even she's spending more than she used to.
The stronger loonie "does influence me to buy more, especially even the little things," she said.
"Last week I was even looking at groceries, and I usually wouldn't buy (them) in the States."
Those comments are mighty familiar to many Canadian retailers who endured the effects of a strong loonie throughout the final weeks of the holiday shopping season in 2007 and into 2008.
The aftermath was messy as many retailers rung up a fraction of their usual revenues while manufacturers slashed their earnings expectations and laid off staff to recover.
After the dollar edged back in 2008, Canadian industries were once again slapped with a global economic recession, which caused them to slash staff even further. It has only been in the past few months that optimism about a recovery has started to develop.
On Friday, Statistics Canada reported that 21,000 jobs were created last month, a better showing than the 15,000 that had been predicted by economists. Meanwhile, the unemployment rate fell to 8.2 per cent from 8.3 per cent.
However, if the dollar sticks around parity then it's always possible that companies could start cutting costs again.
"It's much more doubtful whether the Canadian economy can really live with a currency quite that strong on an extended basis at least not until commodity prices are a lot higher than they are today," said CIBC chief economist Avery Shenfeld.
"We have already wiped out some of the manufacturers and exporters that had a tough time competing with a strong exchange rate."
While few manufacturers will directly blame the value of the loonie for drastic job cuts, it's often a major deciding factor.
Many international corporations will look at forecasts for the dollar when they decide which plants they will close, while others will weigh the currency's effect on profits when they decide whether they're going to set up headquarters in Canada.
On Thursday, Siemens announced it would close its gas turbine plant in Hamilton and move the operations to North Carolina, though executives denied it was because of the Canadian dollar. About 550 workers will be laid off over the next 12 to 18 months.
Early last year, Crocs Inc. shut down its only Canadian plant in Quebec, laying off 669 people, and blamed "high production costs."
Elsewhere, a John Deere factory in Welland, Ont. closed, and Montreal-based petrochemical producer Petromont and Co shuttered two plants, blaming the loonie.
And this year RV manufacturer Glendale International (TSX:GIN) declared bankruptcy partly because of a drop in sales to its key American market, affected by the high dollar.
Even Hollywood movie studios, which choose Canada as a shooting location when the loonie is weak, flee every time the dollar moves higher because the exchange rate is less favourable for production costs.
A report from the Conference Board of Canada suggested that small-and medium-sized businesses will take the brunt of the impact from a higher loonie, partly because they don't have the resources to plan accordingly or global operations to lessen the blow.
"A firm that uses various approaches to globalization... will be better positioned to reduce the financial risks associated with changes in the value of the Canadian dollar," said Louis Theriault, director of the international trade division of the Conference Board.
CIBC's Shenfeld suggested that the latest employment data could push the loonie to parity within the next few weeks after predicting earlier in the week that the dollar would touch parity with the U.S. buck by summer.
He says if speculation that the Bank of Canada will raise interest rates this summer continues to gain momentum, then it will be easier for the loonie to leap even higher.