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Two Exchange Rates a US and Canadian Perspective

There are two ways to write the exchange rate between the US and Canada:  , which is from a US citizen perspective, and  , which is from a Canadian citizen perspective; where CAD=Canadian Dollar and USD=US Dollar.

We will first discuss the exchange rate , how it is interpreted, the implications of fluctuations in the exchange rate for both US and Canadian currency and why a US citizen would be interested in this exchange rate over the other exchange rate.  We will then discuss the   exchange rate.

US Perspective Exchange Rate =

This exchange rate tells you how many CAD you will get for 1 USD.  This exchange rate is of interest to US citizens (i.e. US perspective) since US patrons travelling to Canada want to know how much Canadian currency they get for their domestic US currency. 

Generally speaking the US dollar has been and will most likely always be stronger than the Canadian dollar.  As a result when you convert 1 USD to CAD you will almost always get more than 1 CAD. 

This means that this exchange rate will almost always be greater than 1.

We will take the USD to CAD exchange rate of 1.23 as an example.  As explained above this can be re-written as:  which reads: “1 USD is worth 1.23 CAD.”  With this exchange rate, when a US citizen travels to Canada and they convert 1 US Dollar they will receive 1.23 Canadian Dollars.

Now that we know how to read the exchange rate we can interpret what happens to the strength of the US and Canadian dollar when the exchange rate rises or falls.

An Increase in  exchange rate

To reiterate, this exchange rate is how many CAD you get for 1 USD.  When this exchange rate increases, for example from 1.23 to 1.3, which can also be written as:   to

This means that for the same 1 USD you will get .07 more CAD.  This is an appreciation in the USD since the same US Dollar gets you more Canadian Dollars than at the previous exchange rate. 

As a result this is a depreciation in the CAD. 

A Decrease in  exchange rate

When this exchange rate decreases, for example from 1.23 to 1.18, which can also be written as:   to

This means that for the same 1 USD you will get .05 less CAD.  This is a depreciation in the USD since the same US Dollar gets you less Canadian Dollars than at the previous exchange rate and as a result is an appreciation in the CAD. 

Canadian Perspective Exchange Rate =

This exchange rate tells you how many USD you will get for 1 CAD.  This exchange rate is of interest to Canadian citizens (i.e. Canadian perspective) since Canadian patrons travelling to the US want to know how much US currency they get for their domestic Canadian currency.  Generally speaking the US dollar has been and will most likely always be stronger than the Canadian dollar. 

As a result when you convert 1 CAD to USD you will almost always get less than 1 USD. 

This means that this exchange rate will almost always be less than 1.

We will continue with our example from above where we used an exchange rate of 1.23 when converting USD to CAD.  Since we now want to convert CAD to USD we take the inverse of the exchange rate that converts USD to CAD, which gives us:

This can interpreted as: “1 CAD is worth .81 USD.” 

With this exchange rate, when a Canadian citizen travels to the US and they convert 1 Canadian Dollar they will receive 0.81 US Dollars.

 

Next pageRead the next page about The Rise and fall in exchange and the effects strength US and Canadian dollar

Now that you have performed all the calculations, see a graphical representation of gasoline prices across the USA Here

Read a very detailed analysis of exchange rates and the differences when converting from one currency to another

Rates in above table from Bank of Canada website

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