September 5, 2012 / 3:27 PM / 5 years ago

Canadian dollar seen weakening back to U.S. dollar parity: poll

A Canadian five-dollar bill is seen in this posed photograph in Montreal March 10, 2011. REUTERS/Shaun Best

TORONTO (Reuters) - Canada’s dollar will give back recent gains against its U.S. counterpart, according to Reuters poll released on Wednesday, with the stumbling global economy expected to hurt demand for the commodity-linked currency.

The median forecasts of 49 global foreign exchange strategists saw the Canadian dollar weakening to parity with the greenback in one, three, six and twelve months from now. On Wednesday it traded as low as C$0.9919 to the U.S. dollar, or $1.0082.

“The Canadian dollar looks a bit elevated given the state of global growth, and there may simply be too much optimism about how well the various policy initiatives in the U.S, Europe and Asia are going to do in terms of reviving growth,” said Avery Shenfeld, chief economist at CIBC World Markets.

The Canadian bank forecast the currency would trade at C$1.02 versus the U.S. dollar, or $0.9804 in three months.

The Canadian dollar rallied to C$0.9843, or $1.0160, three times in recent weeks - its strongest level since early May - buoyed by hopes that the U.S. and European central banks will take decisive action to boost domestic growth.

The European Central Bank is facing mounting pressure to reduce crippling borrowing costs for southern euro zone states. It is widely expected to outline its strategy in a key meeting on Thursday.

“Events as they unfold in Europe do suggest without government input and stimulus that the economy there will falter and the expectation is that one country at the very least is likely to exit the euro zone,” said Jack Spitz, managing director of foreign exchange at National Bank Financial, which expects the Canadian dollar to weaken to C$1.04 toward the end of this year.

U.S. SITUATION “GRAVE”

Closer to home, Canada’s biggest trading partner continues to show signs of stagnation, with U.S. Federal Reserve Chairman Ben Bernanke indicating further monetary policy easing was very possible.

“The volatility and the likelihood of a further downturn from both a growth and labor perspective, they speak to a drop in global growth expectation and risk expectations and the Canadian dollar typically weakens in that environment,” said Spitz.

Canada has weathered the global recession better than the other Group of Seven wealthy nations. It was the first to raise interest rates after the global recession.

Nonetheless, Canada’s status as a commodity exporter makes it highly sensitive to global growth. It halted its rate hike campaign in 2010 as Europe’s debt crisis began to hobble the global economy.

The Bank of Canada left its main policy rate unchanged again at 1 percent on Wednesday, as expected, and retained its view that it may have to raise interest rates despite a global slowdown.

In the near term, the currency forecasts range from C$0.98 to C$1.05 a month from now, and between C$0.94 and C$1.12 in a year.

The latest forecasts were still stronger than those of a month earlier poll, which had predicted the currency would weaken in coming months before returning to equal value with the U.S. dollar in one year.

Polling and analysis by Ashrith Rao Doddi, Shaloo Shrivastava and Rahul Karunakar; Editing by Jeffrey Hodgson

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