OTTAWA — The Canadian dollar is undervalued and will soon soar above the U.S. currency again if world oil prices hold up as expected, predict two senior economists, raising the spectre of more troubles ahead in the export-dependent manufacturing economy.

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With oil forecast to end the year near US$150 a barrel, the loonie should rise from the current 98-cent US level to about $1.03, say economists Dale Orr of the forecasting firm Global Insight Canada and Avery Shenfeld of CIBC.

The forecast of a rising loonie will be welcomed by some in Canada, but send shivers down the spines of others in factory and mill towns across the country, whose livelihoods have been threatened by the dollar's appreciation in the last six years.

But with demand for oil expected to outstrip supply for some time, it would be difficult for the Canadian dollar — known as a petro-currency because of Canada's large reserves that are second only to Saudi Arabia — to resist an upward revision, the economists say.

Some economists have disputed the inevitability of a rising loonie, saying the dollar could fall from current levels for a variety of economic reasons.

But Orr said the loonie would already be higher had markets not considered the recent rise in oil prices a temporary spike.

"So much for the temporary oil spike phenomenon," he said. "It's time for the dollar to reflect the fact that oil above $100 a barrel is with us for some time."

The link between oil and the loonie has been established since 2003, when oil began its ascent from US$34 a barrel to US$95 in November last year. During that time, the loonie climbed from about 66 cents US to just above $1.00 US.

But since November, the two parted company and the dollar has actually slid below parity at the same time that oil soared to the US$140 level.

"There are many explanations which are possible — political and or economic, as is always the case with exchange rates," writes Orr.

"However, the most likely reason why the Canadian dollar did not appreciate further above par as the price of oil continued to rise... is that the rise in oil prices was considered to be temporary."

Shenfeld also projects the dollar will recoup lost ground in 2009, saying other reasons for the lag include the fact that the U.S. dollar has strengthened as investors expect U.S. interest rates will head higher.

"Also the market has some concern, given what's happening in Canada's manufacturing sector, the economy can't live with a much stronger exchange rate," adds Shenfeld.

The rise of the Canadian dollar, particularly in the past year, has altered the economic landscape of Canada for the good and bad.