The Evening Wrap: Dollar Goes Loonie
Surging prices of oil and gold, and the increasingly enervated U.S. dollar, have fanned inflation worries after Tuesday's interest rate cut.</br></br>After tumbling through a psychological barricade against the euro, the dollar also plunged to near parity with the Canadian dollar Thursday. The dollar briefly sank to C$0.9998, marking the first time since 1976 that the U.S. currency fell below parity with its northern neighbor. (In late New York trading the Canadian dollar was still dancing around levels roughly even to the U.S. dollar.) The U.S. dollar's slide is partly an off-shoot of the Federal Reserve's decision to lop a half percentage point off its benchmark federal- funds rate two days ago. While Fed chief Ben Bernanke's move to hack away at the rate was welcomed on Wall Street, it also served to make it less appealing to hold dollar-denominated assets by cutting their cash yield. Coupled with the rate cut, the weaker dollar combines for various potential effects, including making imports pricier and raising risks of inflation while also making it easier for American companies to sell overseas. CIBC World Markets analysts say the dollar's retreat against the Canadian currency in particular points to the boom in commodities, which are a key component of the Canadian economy. "Whether it's the exchange rate, the stock market, or housing prices, asset markets are all painting the same picture. Canada is getting richer relative to the U.S. Ultimately that's about the economy," they wrote.</br></br>Whatever is driving the dollar lower, many observers expect it to lose even more strength. Adding to pressure on the buck was Saudi Arabia's decision to keep interest rates on hold this week, rather than cutting as it often does in lockstep with the Fed. The kingdom's currency is basically pegged to the dollar, and the fact that it hasn't followed the Fed's cut with one of its own "has many speculating that they are moving closer to removing the dollar peg," said Camilla Sutton, currency strategist at Scotia Capital in Toronto. If the Saudis do clip their tight ties to the dollar, Ms. Sutton says, "it would cause both a psychological and real drop in demand for the dollar-denominated assets, which would be U.S.-dollar bearish." Likewise, BNP Paribas analysts divined more weakness against European currencies and noted that "the U.S. dollar index risks breaking its historical 1992 low, which would intensify the bearish U.S. dollar tone." The global head of currency research at Lehman Brothers in London, Jim McCormick, agrees, saying "one thing that should be clear is that the rate cut was not dollar friendly. Historically, the worst combination for the dollar has been when U.S. yields have fallen vis- a-vis other currencies and equities and commodities have been rallying." He added that "this is precisely the mix that had been building in recent days and one that should persist in the coming weeks."</br></br>---</br></br>Stocks Slip, Oil Surges, Dollar Drops