Canadian Dollar Value: Loonie Weakens Against U.S. Dollar Over Fears Of European Debt Crisis

TORONTO - (CP) The Canadian dollar was lower against the U.S. currency Tuesday, reflecting a flight to safety to the greenback amid another round of worry over the European government debt crisis.

The dollar was down 0.49 of a cent from Friday's close to 102.28 cents US as domestic markets reopened following the Victoria Day weekend.

"European developments continue to be major drivers of global markets," said a commentary from RBC Dominion Securities.

The currency lost ground on international currency markets Monday after Standard and Poor's lowered its outlook on Italy’s A-plus sovereign-credit rating from stable to negative last Friday. The ratings agency cited potential political gridlock that could derail the government’s plan to balance its budget by 2014.

In addition, investors were also uneasy over the political will in Spain to carry on with austerity measures after the ruling Socialist party sustained severe losses in regional elections during the weekend.

But the main concern centers on whether Greece will restructure its debt, a scenario which ratings agency Moody’s said would constitute a default, which could badly hit the other debt-laden euro countries.

The latest developments sent investors scurrying to the safe-haven status of U.S. Treasuries, and pushed the euro to an all-time low versus the Swiss franc and fell to its lowest level against the U.S. dollar since March.

The higher U.S. dollar had also pressured commodities Monday but prices recovered somewhat Tuesday, partly in response to word from Goldman Sachs Group Inc. that it is turning "more bullish" on raw materials. Goldman Sachs suggested buying oil, copper and zinc, reversing last month’s call to sell commodities.

The July crude contract on the New York Mercantile Exchange gained $1.94 to US$99.64 a barrel, almost making up for Monday's slide of US$2.40.

Metals also advanced as the July copper contract on the Nymex gained five cents to US$4.04 a pound.

Investors looking for safety also pushed June gold $10 higher to US$1,525.40 an ounce.

The Canadian currency was also under pressure after data last Friday showed weakening retail sales and an inflation report that basically met expectations.

Analysts say interest rates also figure into the loonie's weakness as conviction grows that the Bank of Canada will not embark on a string of hikes starting in July, as had been widely expected earlier this year.

"The odds of a (quarter point) increase by the Bank of Canada in July has been shaved to just 12 per cent, with the odds on the September meeting also slipping to just 40 per cent," said the RBC report.

"We believe that such an outcome is inconsistent with the underlying momentum in the Canadian economy (we continue to expect that growth in the first quarter will come in at a pace of near 3 3/4 per cent at an annual rate) but it is hard to fight the strength of the recent move."

Comments

[valar84]

11:08 AM on 05/26/2011

This is a good development for Canada, but one that will not last unless we take action.

A strong dollar is killing Canada's manufacturing sector, today rumors emerged that one of the Oshawa GM plants may close as GM shifts production to the US. Why shut down one of the plants that is the most efficient and well-run of all GM plants? The Canadian dollar, that's why. Our production costs are becoming uncompetitive. What's the point of having a strong dollar if people don't have a paycheck?

This is what is known as the Dutch Disease in economics, if a country has a large quantity of a natural resource and exports it, it may see its currency gain strength, which hurts the rest of its economy. That's why Norway puts a lot of the revenues from oil into a fund made to be invested internationally, to reduce the strength of its currency, and we should do the same.

However, Alberta doesn't want to do that, they live the oil boom and not the manufacturing bust, and Harper governs for the West, mainly for Alberta, the rest of the country be damned. I'm pessimistic on the possibility of this problem being tackled head-on, as it should be.

[vyskol]

10:02 AM on 05/26/2011

As one of the world's largest exporters, a lower Canadian dollar is generally a good thing.

[TheKingElroy]

01:40 PM on 05/26/2011

Im getting killed -- uugghh-- bring back the .85 dollar!!

[SnapLake]

09:27 AM on 05/26/2011

The BofC is still keeping interest rates artificially low and regardless who or what is in power we dance to the tune of the Central Bank of Canada. Borrow to expand the military, borrow to service the debt, borrow to fund entitlements, borrow, borrow, borrow, tax, tax, tax all from the BofC. Now you tell me who's really pulling the strings here, Harper? Guess again.