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Why 2011 could be year of the loonie Add to ...

This could well be the year of the loonie.

While the Canadian dollar may not rack up the hefty gains of, say, 2009, when it climbed 16 per cent, it is expected to still remain strong throughout the year.

Yesterday, Goldman Sachs Group Inc. projected the loonie will trade at about $1.05 U.S. That's close to the $1.04 predicted by Scotia Capital, where currency strategist Camilla Sutton projects a strong year for commodity-linked currencies in general.

"We are beginning 2011 with a notably strong [Canadian dollar]" Ms. Sutton said. "Risks stemming from Europe and the global recovery remain a key threat; however the combination of loose U.S. monetary policy, a global search for yield and diversification combined with a generally weak [U.S. dollar]should help to support [the Canadian dollar]through parity."

The loonie continued today to trade today above parity. Ms. Sutton noted that the currency's strength to date has been largely driven by a weaker U.S. dollar and higher commodity prices. While the difference between interest rates in Canada and the United States hasn't yet been a factor, she added, it will become one later in the year.

"The Canadian dollar is on a tear as the combination of rising commodity prices (particularly oil) and a bullish outlook for U.S. economic growth in 2011 leads to a sell Europe, buy North America mentality," said Rahim Madhavji of Knightsbridge Foreign Exchange.

The strength in the dollar is a concern for the Bank of Canada, and comes amid a so-called currency cold war that has seen other countries manipulate their money to hold down values, in turn keeping down prices of their exports.

The loonie's strength, added Scotia Capital economists Derek Holt and Gorica Djeric, will stop the Bank of Canada from raising its benchmark rate again until October.

Goldman Sachs said yesterday that it expects the U.S. currency to remain under pressure this year, which "likely positions the Canadian dollar as one of those currencies particularly well placed to benefit."

Helping boost the loonie, it said, will be stronger manufacturing exports to the U.S., the Bank of Canada boosting rates ahead of the Federal Reserve and continuing rises in prices of oil and other commodities.

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