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Pressures mount on loonie Add to ...

Here's Allan Robinson's At The Bell which you'll find in Thursday's newspaper: The Canadian dollar dropped sharply yesterday, putting it among the worst performers of the world's major currencies against the U.S. dollar as politics adds to the economic woes. The loonie fell about 1.2 per cent before mounting a rally to close down 0.5 per cent, bringing the decline against the greenback on a year-to-date basis to 20 per cent. WHAT ARE THE EXPECTATIONS? "It's a pretty bearish mix of factors for the Canadian dollar," said Steve Malyon, a currency strategist for Scotia Capital Inc. "The political risks add weight to the global slowdown." For now the loonie is being driven by the volatility in equity markets, weak commodities and the continued deterioration in the global economies. "I have a difficult time envisioning this current political situation leapfrogging into becoming the key driver for the Canadian dollar," said Dustin Reid, foreign exchange strategist for RBS Global Banking and Markets in Chicago. The biggest question for currency traders as well as for commodity prices is the continuing strength of the U.S. dollar. Any weakness in the dollar could trigger some commodity price gains. The U.S. dollar could give back some of its gains starting in early 2009 as the strong flight to the greenback dissipates, Mr. Malyon said. However, a major shift is also under way in the world's financial markets. The sharp decline in interest rates globally is reducing the attractiveness of the carry trade in which traders would borrow money in low-interest-rate countries and reinvest in high-yielding securities of other countries. The powerful rally in the Japanese yen, which is up about 20 per cent against the U.S. dollar on a year-to-date basis, reflects the aversion to risk and unwinding of the carry trade as hedge funds buy the yen to repay their Japanese loans. "I would say the U.S. dollar will continue to strengthen in the next few months, not so much because it could become the carry-trade currency [as regulated rates close in on zero] but because interest rates globally could converge," said Paresh Upadhyaya, a senior vice-president and currency portfolio manager of Putnam Investments. "U.S. growth is slowing, but that is priced into the market," he said. "Expectations of global growth have come down much more dramatically than in the U.S."

 

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