From the Globe and Mail
Dollar streaks higher
TAVIA GRANT
Globe and Mail Update
The Canadian dollar extended this week's gains, marking a new 14-year high Thursday, after a spate of positive economic reports and as investor sentiment soured against the U.S. currency.
The dollar rose to 88.49 cents (U.S.), its highest level since November, 1991. It closed 0.32 of a cent higher at 88.39 cents. Among the 62 global currencies tracked by Bloomberg News, the loonie is the world's third-best performing currency this week against the U.S. dollar, with a 1.9-per-cent gain.
The move comes after reports this week showed Canada's gross domestic product rose more than expected in December, while the current account surplus widened to a record in the fourth quarter.
The U.S. dollar, meantime, buckled after weaker-than-expected reports this week on housing, consumer confidence, manufacturing and construction.
“The Canadian dollar has benefited from the overall weakness in the U.S. dollar,” said Paresh Upadhyaya, portfolio manager at Putnam Investments in Boston. “The fundamentals in Canada still look solid, so expectations are the Bank of Canada will continue to tighten interest rates.”
He thinks the loonie will go higher in the months to come.
The central bank is widely expected to raise its benchmark rate on Tuesday to 3.75 per cent from 3.5 per cent.
Unlike in recent months, when rising commodity prices prompted some to dub the currency a “petro-dollar,” this week's move came despite natural gas prices that are 50 per cent lower than their record in December.
“This suggests that recent currency appreciation may be increasingly driven by speculative flows,” said Stéfane Marion, an economist at National Bank Financial, in a research note. “In light of the very tame inflation backdrop, we believe that the BoC has the luxury to move to the sidelines (at least temporarily) after its next meeting in reaction to the Canadian dollar's appreciation.”
In a speech last February, Bank of Canada Governor David Dodge outlined two reasons for exchange-rate movements. Type One arises when demand for Canadian goods and services increases. Type Two stems from the rebalancing of portfolios in financial markets.
If movement in the loonie is being caused a Type Two scenario, and not by a fundamental increase in demand for Canadian goods, pressure on inflation would be downward and monetary policy would be “more stimulative [or have lower rates] than it otherwise would have been,” Mr. Dodge said at the time.
The strong dollar continues to take a toll on Canadian exporters. This week, General Motors of Canada Ltd. president Michael Grimaldi said Canada's cost advantage over the United States in automobile assembly has been almost entirely eroded, partly because of the soaring dollar.
“We've talked a lot about the strengthening of the Canadian dollar, which in some cases is positive for the country of Canada, [but] in other cases for certain industries and companies where you have to export, the stronger dollar raises the effective price of your product,” he said.
The loonie closed Wednesday at 88.07 cents. It's risen about 31 per cent over the past three years against the U.S. dollar.
With files from reporter Greg Keenan.
Dollar streaks higher
TAVIA GRANT
Globe and Mail Update
The Canadian dollar extended this week's gains, marking a new 14-year high Thursday, after a spate of positive economic reports and as investor sentiment soured against the U.S. currency.
The dollar rose to 88.49 cents (U.S.), its highest level since November, 1991. It closed 0.32 of a cent higher at 88.39 cents. Among the 62 global currencies tracked by Bloomberg News, the loonie is the world's third-best performing currency this week against the U.S. dollar, with a 1.9-per-cent gain.
The move comes after reports this week showed Canada's gross domestic product rose more than expected in December, while the current account surplus widened to a record in the fourth quarter.
The U.S. dollar, meantime, buckled after weaker-than-expected reports this week on housing, consumer confidence, manufacturing and construction.
“The Canadian dollar has benefited from the overall weakness in the U.S. dollar,” said Paresh Upadhyaya, portfolio manager at Putnam Investments in Boston. “The fundamentals in Canada still look solid, so expectations are the Bank of Canada will continue to tighten interest rates.”
He thinks the loonie will go higher in the months to come.
The central bank is widely expected to raise its benchmark rate on Tuesday to 3.75 per cent from 3.5 per cent.
Unlike in recent months, when rising commodity prices prompted some to dub the currency a “petro-dollar,” this week's move came despite natural gas prices that are 50 per cent lower than their record in December.
“This suggests that recent currency appreciation may be increasingly driven by speculative flows,” said Stéfane Marion, an economist at National Bank Financial, in a research note. “In light of the very tame inflation backdrop, we believe that the BoC has the luxury to move to the sidelines (at least temporarily) after its next meeting in reaction to the Canadian dollar's appreciation.”
In a speech last February, Bank of Canada Governor David Dodge outlined two reasons for exchange-rate movements. Type One arises when demand for Canadian goods and services increases. Type Two stems from the rebalancing of portfolios in financial markets.
If movement in the loonie is being caused a Type Two scenario, and not by a fundamental increase in demand for Canadian goods, pressure on inflation would be downward and monetary policy would be “more stimulative [or have lower rates] than it otherwise would have been,” Mr. Dodge said at the time.
The strong dollar continues to take a toll on Canadian exporters. This week, General Motors of Canada Ltd. president Michael Grimaldi said Canada's cost advantage over the United States in automobile assembly has been almost entirely eroded, partly because of the soaring dollar.
“We've talked a lot about the strengthening of the Canadian dollar, which in some cases is positive for the country of Canada, [but] in other cases for certain industries and companies where you have to export, the stronger dollar raises the effective price of your product,” he said.
The loonie closed Wednesday at 88.07 cents. It's risen about 31 per cent over the past three years against the U.S. dollar.
With files from reporter Greg Keenan.
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