Loonie flat but could be set for more losses

Wed Jan 23, 2008 9:39am EST
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By Frank Pingue

TORONTO (Reuters) - The Canadian dollar was flat versus the U.S. dollar on Wednesday as equity markets looked ripe for another rough session while nagging concerns about global growth weighed on commodity prices.

Domestic bond prices rose across the curve as investors were lured by the safety offered by government debt amid talk of more interest rate cuts in Canada and the United States.

At 9:20 a.m., the Canadian unit was at C$1.0277 to the U.S. dollar, or 97.30 U.S. cents, up from C$1.0281 to the U.S. dollar, or 97.27 U.S. cents, at Tuesday's close.

Concerns that a weak U.S. economy could lead to a global economic slowdown shook commodity prices and kept the Canadian dollar from pushing higher given the nature of commodities that Canada produces.

Helping to support the Canadian dollar is the favorable Canada-U.S. interest-rate gap after an emergency interest rate cut by the U.S. Federal Reserve on Tuesday that was followed by a smaller cut by the Bank of Canada.

"There's a little bit of a tug-of-war for the Canadian dollar between rising rate spreads... and declining commodity prices," said Doug Porter, deputy chief economist at BMO Capital Markets. "I think ultimately lower commodity prices are going to win the day and undercut the (Canadian) currency."

And with equity markets being used as a barometer for the economy, the Canadian dollar could face additional pressure if stock markets tumble amid fears of more write-downs at U.S. banks and worries about a U.S. recession.

Porter also suggested a drop in Canada's composite leading indicator by 0.1 percent in December, which extended a rather steady string of weak domestic economic data, did not help the Canadian dollar.   Continued...

<p>Newly pressed Canadian one dollar coins, also know as loonies, at the Royal Canadian Mint in Winnipeg on November 14, 2007. REUTERS/Fred Greenslade</p>