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Look! Up in the Sky! It's ... the Loonie!

Canadian Loons
Winfried Wisniewski |The Image Bank | Getty Images
Canadian Loons

Thanks to higher oil prices and a gradually improving U.S. economic outlook, the Canadian dollar is riding high.

It wasn't too long ago that the Canadian dollar was a wallflower next to its southern neighbor.

But today the loonie hit a three-year high against the U.S. dollar, trading around $1.0325, and strategists think the strength could continue.

Oil and economics are driving the loonie's rise.

Higher oil prices might hurt the American dollar, but they are great news for the world's fourth-largest oil exporter. Expectations that the Bank of Canada will raise interest rates before the Fed does anything of the kind are also helping the loonie. And since Canada's economy is so closely tied to the U.S., traders looking at fundamentals can take heart in the gradually improving economic indicators emanating from sourth of the U.S.-Canada border.

What could go wrong?

Camilla Sutton, chief currency strategist at Scotia Bank, would be wary of a spike in risk aversion, which would cause a flight to the U.S. dollar and a weakening in CAD/USD as a result. Signs of more hawkishness at the Fed or economic weakness in Canada would also hurt. But she thinks these outcomes are less likely than those that would help the loonie, and she expects it to rise to $1.05 by year-end and $1.08 by the end of 2012.

CURRENCY FUTURES

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