The Canadian dollar soared above US99¢ to a five-month high Wednesday, tossed higher in foreign exchange markets roiled by a sinking U.S. greenback.

The loonie is being pushed higher amid speculation the U.S. Federal Reserve will soon ease monetary policy, sending the greenback down even further. Moves by other countries to cap their currencies, in response to the plunging greenback, are making the loonie an attractive alternative for investors.

Countries are scrambling to keep their currencies competitive in a global battle over exports.

Finance Minister Jim Flaherty expressed concern Wednesday about how this so-called currency war would play out in Canada.

There is “a danger” countries such as Canada, which allows the loonie to float freely in foreign-exchange markets, would become “disadvantaged by certain interventions made by other countries and [currency] inflexibility,” he said. “We don’t want these type of distortions in currency values and trading relationships.”

In the recent past, robust consumer spending, especially in the housing sector, would offset weak trade data. But there’s doubt that can be replicated this time as household balance sheets have become increasingly stretched, as Bank of Canada governor Mark Carney warned last week.

Mr. Flaherty’s worries are justified, as net trade knocked a whopping 4.4 percentage points off GDP growth in the second quarter.

A stronger dollar would mean net trade continues to be drag “with the chance to deteriorate even more,” said Eric Lascelles, chief Canadian strategist at TD Securities.

In recent days, Japan, South Korea and Brazil have intervened to cap the appreciation in their currencies. In addition, Japan cut interest rates even further, from 0.1%, and announced plans to buy up assets to lower longer-term lending costs. The U.S. Federal Reserve is also expected to pursue so-called quantitative easing, as inflation remains too low and job creation is proceeding at near crawl.

This activity in foreign exchange markets and the anticipated flood of additional U.S. dollars has sent investors to Canada, whose central bank shows no sign of further easing, and hard assets, like gold and commodities. This double-whammy helped push up the loonie over the US99¢ mark before finishing the session at US98.97¢, or a 67-basis-point gain.

“We are on the receiving end of all this,” said Stéfane Marion, chief economist at National Bank Financial. He added the federal government might need to consider providing some form of fiscal support to help companies absorb what could end up being a “large shock” on the exchange-rate front.

In its latest global economic outlook, the International Monetary Fund said that Canada -- which is expected to be the top economic performer among major advanced economies -- has fiscal room to manoeuvre “should conditions worsen unexpectedly.”

Derek Holt, vice-president of economics at Scotia Capital, said recent developments in Japan and on foreign exchange markets present new wrinkles for the Bank of Canada.

“The Bank of Canada could well ultimately face comparable exit challenges to other central banks even without Canadian [quantitative easing] via having little near-term choice but to maintain too low rates for too long,” he said in a note to clients. “That could only further aggravate domestic imbalances in housing and household finances, or defer needed adjustments.”

Yields on 10- and 30-year government of Canada bonds have either dropped below or are near levels hit at the peak of the 2008 credit crunch, which means borrowing costs will still look tempting to households, even if balance sheets are stressed.

“Maybe that’s why the Bank of Canada is going out of its way to warn households not to over do it,” said Douglas Porter, deputy chief economist at BMO Capital Markets.

Yet, Mr. Porter added Canada could recoup some benefits from U.S. quantitative-easing efforts. Should the Fed’s efforts succeed in revving up the U.S. recovery, then Canadian GDP stands to benefit. Plus, Canada stands to gain from better terms of trade as commodity prices surge on U.S.-dollar weakness.

As for household debt levels, they are admittedly high. Still, Canadian consumers have some flexibility as asset values have also surged and could continue to do so should easing measures drive stock markets higher, Mr. Porter said.