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Pedestrians walk in Toronto's financial district on Oct. 29, 2012. The belief that the commodities boom of the past decade caused the decline in Canada's manufacturing sector is being challenged in a new report that also takes a swipe at the notion of the loonie as a petro-dollar.Nathan Denette/The Canadian Press

As currency tensions mount across the globe Wednesday, a new report looks at what's driving the strength of the Canadian dollar, and how it may have moved from a "petro-currency" to the "Bay St. Buck."

The report by Philip Cross for the Macdonald-Laurier Institute comes as the loonie, the nickname for Canada's dollar, continues to run above parity with the U.S. currency and is projected to hold at that level, give or take a few cents, at least through the end of next year.

It also comes amid talk of a "currency war" as the strength of some currencies threaten the exports of their countries. The strong dollar has been a concern in Canada, among both policy makers and the country's exporters.

The loonie has oft been referred to as a petro-currency because of Canada's resource-fuelled economy. It traditionally moves in tandem with oil prices because, noted senior currency strategist Camilla Sutton of Bank of Nova Scotia, both are sensitive to the same drivers, such as global economic growth and the fortunes of the U.S. dollar.

She agreed the long-standing correlation has broken down temporarily.

The study on so-called Dutch Disease by Mr. Cross, released by the think tank, notes how Canadian oil prices lag those of world benchmarks, but how the dollar has been propped up by foreign money flooding into the country by the hundreds of billions.

Many observers have noted this development, driven by Canada's economic outlook, the strength of its banks and the fact that it remains one of the few countries to still boast a triple-A credit rating.

Since the early days of the financial crisis in 2007, says Mr. Cross, formerly Statistics Canada's head economic analyst, foreign investors have gobbled up almost $275-billion in Canadian bonds. Compare that to a decline of $66- billion in the five years since the loonie began climbing after 2002.

"Foreign interest has been confined to the safe haven of bonds, as foreign direct investment and investment in stocks were unchanged over the same period," he said.

"The conclusion is that the recent strength of the exchange rate no longer can be attributed solely to commodity prices, and therefore resource prices cannot be singled out as the source of problems in Canada's manufacturing sector," he added.

"Instead of a 'petro-currency,' we may now have the 'Bay St. Buck.'"

As the report was being released, Russia was citing its concerns over a currency war.

"Japan is weakening the yen and other countries may follow," Alexei Ulyukayev, the first deputy chairman of Russia's central bank, told a conference in Moscow, according to Bloomberg News.

His comments, in turn, followed comments late Tuesday by Jean-Claude Juncker, Luxembourg's prime minister and the chief of the group of finance ministers of the euro zone. He warned that the euro is now "dangerously high."

However, that was softened somewhat as an official of the European Central Bank said the euro's strength was not a major trouble spot.

"It appears that European policy makers have woken up to the fact that the recent rebound in the euro may be doing more harm than good after outgoing eurogroup chief and Luxembourg Prime Minister Juncker stated that the single currency was reaching 'dangerously high' levels," said senior analyst Michael Hewson of CMC Markets in London.

"Unfortunately this appears to be the price for the recent decline in Spanish and Italian bond yields, which have been highly correlated with the euro as pressure on the ability of the Spanish and Italian governments to sell their bonds has subsided," Mr. Hewson said in a research note.

"If yields continue to fall then we could well see further euro gains towards $1.40 which would ratchet up the problems once again in the weaker economies as they struggle to rebalance."