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The Globe and Mail

Loonie weakening continues, ending at 18-month low

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


The Canadian dollar tumbled to its lowest level in more than 18 months Friday as the U.S. dollar continued to appreciate.The loonie was down for a sixth successive session, falling 0.76 of a cent to 95.64 cents (U.S), its lowest close since late November, 2011, amid data showing a disappointing read on Canadian retail sales and tame inflation. At one point during the session, it was as low as 95.47 cents, again the lowest since November, 2011.

But the real culprit was a stronger U.S. dollar, which has risen since Federal Reserve chairman Ben Bernanke indicated that the U.S. central bank is likely to start winding up monetary stimulus later this year.

He signalled Wednesday that the Fed will begin to slow its bond purchases this year and end them in 2014 – an indication that the U.S. economy is getting strong enough to withdraw the extraordinary stimulus program.

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A weaker loonie tends to help sectors of the economy that sell Canadian goods and services to the United States but could make it more expensive for consumers to vacation or shop across the border.

The U.S. currency has strengthened as bond yields increased amid growing expectations that the end is in sight for a Fed program known as quantitative easing, which stimulates the economy through bond purchases.

The yield on the U.S. benchmark 10-year bond hovered around 2.4 per cent Friday morning, up from about 2.25 per cent before Mr. Bernanke made his announcement Wednesday. The yield was as low as 1.6 per cent in early May.

The Fed's purchase of $85-billion a month in bonds has kept long-term rates low and also helped fuel a strong rally on stock markets, the resource-heavy TSX being an exception.

Analysts suggested the loonie is likely in for further pressure in the near term.

"Typically what we see in these broad periods of U.S. dollar strength is that they don't last forever, that they do last a few weeks," said Camilla Sutton, chief currency strategist for Scotia Capital.

"We have extreme dramatic moves but then it takes a long, long time to retrace ... so I would say that the Canadian dollar has weakened away from parity in the near term and [is] likely to still be weak when we look out in the next couple of weeks."

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Statistics Canada said the annual inflation rate rose to 0.7 per cent in May while core inflation was stable at 1.1 per cent, both below expectations.

Inflation was up 0.2 per cent in May from April. The consensus estimate had been for a month-over-month rise of 0.4 per cent and a year-over-year increase of 0.9 per cent.

April's headline inflation rate had been an extremely low 0.4 per cent and core inflation was 1.1 per cent, which is at the low end of the Bank of Canada's target range of between 1.0 and 3.0 per cent.

Canadian retail sales edged up a weaker-than-expected 0.1 per cent to $39.5-billion (Canadian) in April, following flat sales in March. Statistics Canada said stronger sales at motor vehicle and parts dealers were offset by weaker sales at gasoline stations. Economists had expected sales to rise by 0.2 per cent.

Commodity futures also started to bounce back from a severe mauling. Prices fell heavily Thursday, partly because of demand concerns that arose from a weak reading on Chinese manufacturing but also because of the appreciating greenback.

A higher U.S. dollar pressures commodities because a stronger greenback makes it more expensive for holders of other currencies to buy oil and metals, which are dollar-denominated.

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The August crude contract on the New York Mercantile Exchange fell $1.45 (U.S.) to $93.69 a barrel.

July copper edged up 3 cents to $3.18 a pound and gold climbed $5.80 to $1,292 an ounce.

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