The high-flying dollar is expected to diminish Canada’s economic growth over the remainder of this year, according to the Conference Board’s Canadian Outlook – Summer 2007.

“The surge in the Canadian dollar during the second quarter of 2007 exceeded anything we have seen recently, and it put additional strain on manufacturers and exporters,” said Pedro Antunes, director, national and provincial forecast, in a news release. “Canadian manufacturers are expected to respond by investing heavily in productivity-enhancing machinery.”

Although the Canadian economy charged ahead in the first quarter, the rising loonie has led the Conference Board to downgrade its 2007 growth forecast to 2.5% for this year, instead of the 2.8% forecast in the Spring Outlook.

According to the Conference Board, the rise in the dollar occurred not because of changes in economic fundamentals, but through changed financial market sentiment toward the Canadian economy. In addition to the strong dollar, the fact that U.S. growth will be modest will limit Canada’s export growth potential in 2007.

After Tuesday’s interest rate increase, the surging dollar should restrain the Bank of Canada from raising short-term interest rates further.

In 2008, stronger economic growth of 3.2% is expected, thanks to a better trade performance and steady consumer spending, the Conference Board said.