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The Canadian dollar hit a 10-month high Monday, fuelling fears the rapid rise will hamper Canada's fragile economic recovery.

Higher commodity prices, rising equity markets and a weak U.S. dollar helped send the loonie to 92.5 cents (U.S.) by the Bank of Canada's official close Monday afternoon, up 0.16 of a cent from Friday.

"The Canadian dollar is probably strengthening too rapidly for the economic fundamentals to play catch-up in the near term. It's starting to cause some beads of sweat," Bank of Nova Scotia currency strategist Sacha Tihanyi said in an interview.

"Our exporters are still under pressure … so it's definitely a negative at this point," said Mr. Tihanyi, noting that the Bank of Canada has expressed concern that the rising dollar could constrain growth but has opted not to intervene at this point.

Bank of Montreal economist Douglas Porter said in an interview that the Canadian dollar has risen 6 cents against the U.S. dollar in the last two weeks alone and if it continues its ascent, "it's going to begin to exert a drag."

However, as the trading day came to a close Monday, Colin Cieszynski, market analyst with CMC Markets Canada, said that - after its rapid rise over the past couple of weeks - "the loonie could be due for some consolidation" and could settle into the 90-to-92.5-cent range for the early part of this week, at least.

"We've had a good rally in the equity markets, we have had a good rally in the commodity markets, and we have a good rally on the loonie …we're probably due for a bit of a pause here," Mr. Cieszynski said in an interview.

Mr. Porter said Canadian consumers and travellers will eventually benefit from the increased purchasing power of the loonie. But manufacturers, already suffering from weak export markets, will face further difficulty selling goods priced in higher Canadian dollars, he said.

The Bank of Canada typically does not employ monetary policy to influence the level of the Canadian dollar, Mr. Porter and Mr. Tihanyi said. But if the currency continues to rise, central bank officials have indicated that they might intervene.

Last Thursday, Bank of Canada Governor Mark Carney said the recession is over in Canada and the economy is in the early stages of recovery. However, he also said he is prepared to intervene in currency markets if the Canadian dollar's rise persists and threatens to smother the "nascent" recovery.

The Canadian central bank has not intervened in currency markets since 1998, and has a stated policy to do so only in extreme circumstances.

Mr. Tihanyi and Mr. Porter said Monday that the Bank of Canada's preferred course would likely be a "verbal intervention" - talking the dollar down by threatening possible intervention in the currency markets.

"While Governor Carney didn't reveal any earth-shattering preferences for the level [of the Canadian dollar] he did mention that this is something the Bank of Canada considers to be a risk to the outlook and that they are watching it closely," Mr. Tihanyi said.

"If fundamentals such as growth indicators, terms of trade, commodity prices, financial and credit market conditions… do not improve to justify the Canadian dollar gains while currency strength persists to a degree which negatively impacts the bank's growth and inflation outlook, then the bank could be forced to act to ease monetary policy to counteract the contractive forces on the economy," Mr. Tihanyi said in his research note.

He added the central bank appears to be "staying its hand" for now, but if the loonie continues its trajectory toward parity, a 95-cent Canadian dollar would likely be "the pain point" that forces the Bank of Canada to intervene if overall economic growth continues to lag.

Such intervention could be in the form of quantitative easing, which dilutes the value of the currency by increasing money supply - although Canada would face pressure from other industrialized nations if it took deliberate steps to devalue the currency and give Canadian exporters a trade advantage, Mr. Tihanyi said. Or the bank could offset the impact of the higher Canadian dollar through credit easing, which would lower the cost of borrowing.

Mr. Porter noted that while the Bank of Canada voiced concerns about the level of the Canadian dollar in its monetary policy report last week, it did not "sound particularly fussed." Furthermore, the upbeat message that the Canadian economy is now at the beginning of a modest recovery had the effect of "green-lighting further gains for the currency."

The Canadian loonie was last at par with the U.S. dollar last summer before tumbling to the 77-cent range last fall.

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