Loonie Value Takes A Hit

For a little over a month, there has been a lot of news about the Canadian dollar creeping up on its American counterpart to match its worth in value. The strenghtening loonie, it seems, is strangely becoming a threat to Canada's economic recovery. As a result, the Bank of Canada has weakened the loonie's worth by two cents today.

Writes Julian Beltrame of The Canadian Press: “In one of the gloomier reports in months, the central bank’s governing council declared that a strong loonie would threaten Canada’s economic recovery, saying its recent rise had already more than offset all the encouraging indicators seen over the summer months.”

Beltrame notes that the bank's belief that the strength in the Canadian dollar may lead to slower growth of the nation's economy has forced it to keep its interest rate at the all-time low of 0.25 per cent. It has been at this rate since spring time.

As of Beltrame's report today, the Canadian dollar stood at 95.35 cents, down 1.8 cents from yesterday. He reveals that economists see this as no surprise considering the expectation of the Bank of Canada to follow Australia's lead in increasing interest rates.

At this point, the bank predicts that the national economy will decrease by 2.4 per cent this year as opposed to the 2.3 per cent forecast a month ago. With no sign of inflation in the near future, it looks as if the Bank of Canada's govenor Mark Carney will maintain the bank's 0.25 per cent interest rate until July 2010.

Says CIBC chief economist Avery Shenfeld: “The delay in returning back to its target rate on inflation would allow a longer period of keeping rates on hold. Financial markets tend to get edgy sitting still, but Carney is a man in no hurry to act.”

Last month, the bank was under the impression that the nation's economic recovery was so promising that it forecast a 1.3 per cent gross domestic product growth in the third quarter and a 3 per cent growth in the fourth. This was at a time, however, that the Canadian dollar was predicted to average 87 cents US through next year.

This month, Carney sees the loonie as a force that will slow down future growth. Before today's drop-off, the loonie was about 10 cents US above the value projected by the bank. It was expected to hit parity and greater by the end of the year.