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The Globe and Mail

Loonie dives after pessimistic Bank of Canada outlook

Canadian dollars (loonies) are pictured in Vancouver, B.C. Thursday, Sept. 22, 2011.


The Canadian dollar tumbled well over a full cent (U.S.) Tuesday after briefly hitting parity with the greenback as the Bank of Canada delivered a bleak economic assessment while keeping its key rate unchanged at 1 per cent.

The loonie moved down 1.29 cents to 98.4 cents US.

The central bank observed that the global economy has slowed markedly along with an increase in financial market volatility and a retrenchment from risk-taking.

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"The combination of ongoing deleveraging by banks and households, increased fiscal austerity and declining business and consumer confidence is expected to restrain growth across the advanced economies," the bank said in a statement.

The Bank of Canada estimated Canada's economy likely grew a modest 2.1 per cent this year – most of it in the first quarter – and will fare even worse at 1.9 per cent next year. Both numbers were 0.7 of a percentage point less than the bank had projected in July.

Also, the U.S. dollar strengthened after officials decided that key parts of a package meant to deal comprehensively with the euro zone's government debt crisis will not be ready in time for a leaders' summit on Wednesday.

A meeting of European Union finance ministers, which was to be held just before the summit, was called off. A summit of EU and euro zone leaders planned for Wednesday evening will still be held, but its conclusions on the grand plan may remain vague without the technical work having been concluded.

The loonie had run as high as $1.0011 on Tuesday. The currency hasn't closed above parity with the greenback since Sept. 20.

Oil prices were sharply higher for a third session with the December contract up $1.90 at $93.17 a barrel.

Bullion prices were also positive as the December contract rose $48.10 to $1,700.40 an ounce.

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Copper prices were off 3 cents at $3.42 a pound after jumping 23 cents on Monday.

Traders also took in a solid retail sales report.

Statistics Canada said sales rose a stronger than expected 0.5 per cent to $37.8-billion (Canadian) in August. The advance followed a 0.6 per cent decline in July and was stronger than the 0.2 per cent gain that economists expected.

The agency said the increase in August was led by higher sales at gasoline stations and at motor vehicle and parts dealers.

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