TD Bank economists see better times ahead for the Canadian dollar.

TD Economics notes that the U.S. dollar has been “surprisingly resilient to the weakness of the U.S. economy. The currency has shrugged off news of a pronounced economic slowdown, aggressive interest rate cuts by the Federal Reserve, a drop in equity values and a contraction in corporate profits.”

It says that the dollar is holding up as U.S. weakness spreads throughout the world. “With much of the world economy infected by the U.S. slowdown, there has been little incentive to sell the U.S. dollar.”

Heading into 2002, TD Economics says a recovery in the global economy is expected to help deflate the overvalued U.S. dollar. But it cautions that the downside is likely to be limited. “A resurgence in U.S. corporate profits will keep foreign capital flowing into the U.S., while interest rate spreads are likely to shift in favour of the greenback. With the U.S. unemployment rate expected to peak at a still-low 5%, the Fed will be quick to move monetary policy to a more neutral stance, with an anticipated 150 basis points of Fed rate hikes over the course of 2002 providing support to the U.S. dollar.”

While other currencies will likely suffer in comparison, TD says that the Canadian dollar should benefit from the U.S. recovery. “Investors will recognize that an economic upswing in the U.S. will boost Canadian exports significantly and help maintain Canada’s large current account surplus. Furthermore, a revival in U.S. demand for raw materials will push commodity prices higher, providing another lift to the loonie. Meanwhile, positive interest rate spreads will continue to support the currency. The recent rally in the Canadian dollar from almost a record low in early April suggests that financial markets are already starting to anticipate these developments.”