Commodity Currency

The Canadian dollar is considered a commodity currency, meaning the decline in the price of crude oil, metals and minerals due to shrinking global demand has been a major factor in the loonie's fall.

December crude contracts fell $5.43 to settle at US $66.75, the lowest close for a front-month futures contract since June 13, 2007, when crude settled at $66.26.

But the relative strength of the U.S. dollar against other major currencies is also having a major impact, said Steve Malyon, a currency strategist with Scotia Capital.

"It is a bit counterintuitive to have all this U.S. dollar strength, given that the subprime crisis started in the United States, but I think the key observation is that it started in the United States but it didn't stop there," Malyon said.

"It's sort of an ugly contest in global currency markets. The U.S. dollar doesn't look terribly great, but neither do a lot of other places."

In fact, Malyon said, the loonie has fared comparatively well next to some of its peers -- losing about 18.5 percent of its value against its U.S. counterpart from July 1, while the New Zealand and Australian dollars have lost 22 percent and 30 percent, respectively.

The euro has seen a decline similar to that of the Canadian dollar.

The U.S. dollar has also been given a boost by investors eager to buy the currency to pay back debt, Shenfeld said.

"Investors that had borrowed in U.S. dollars and are now seeing losses on their investments are attempting to pay back their loans and are buying U.S. dollars in the process."

Rising prices for everything from bananas to computers are another persistent worry when the dollar drops, as goods imported from the U.S. and other countries suddenly cost more.

But this time, a global slowdown in demand combined with lower costs for raw materials is making consumer goods cheaper and should therefore insulate the Canadian economy from inflation, said Malyon.

"The decline in commodities has been far greater than the decline in the Canadian dollar," he said.

"When you net it all out, we have a fairly significant disinflationary pulse that's going to work its way through the economy."

Malyon added that this should allow the Bank of Canada to continue cutting interest rates to stimulate the economy, at least in the short term.