Loonie falls 1.5 cents US in biggest one-day drop since October

Loonie falls 1.5 cents US in biggest one-day drop since October

TORONTO — The Canadian dollar took an unusually big dip Wednesday, falling about 1 1/2 cents in the biggest single-day decline since October.

The drop was attributed to a number of factors, including a report from Statistics Canada which showed that domestic inflation wasn’t as strong in December as expected.

The loonie was also impacted by renewed strength in the U.S. dollar, which climbed against the euro as well.

At one point the loonie was down 1.68 cents at 95.34 cents US before recovering slightly to finish down 1.51 cents at 95.51 cents US.

Currency watchers at Scotia Capital said the American dollar was ahead partly because of developments in China, where the chief banking regulator said some banks have been asked to reduce their lending.

The tighter lending polices in China increased fears of slower growth in a country that has been a major market for commodities produced by Canadian companies.

George Davis, chief technical analyst at RBC Capital Markets, also noted the Statistics Canada report on inflation further reduced the already slim possibility that the Bank of Canada will start raising interest rates before mid-year.

Higher interest rates tend to attract foreign investors who would need more of the Canadian currency to make their deals, but higher rates also tend to dampen domestic borrowing, which can discourage Canadians from buying real-estate or domestic companies from acquiring new equipment.

But with Canada’s central bank saying Tuesday that it’s holding onto a plan to keep its policy rate at the historic low of 0.25 per cent and the chief Canadian statistical agency saying Wednesday that the national inflation rate was 1.3 per cent in December, there’s less of a chance that interest rates will move up soon.

Many economists had expected inflation would come in higher last month, but still remain within the Bank of Canada’s target range of between one and three per cent.

“If there was any evidence that inflation was starting to firm up, then that would certainly put people on the defensive and raise that possibility and that would have been a potentially bullish factor for the Canadian dollar,” Davis said.

“Now given the fact that the numbers came in weaker than expected, I think it kind of takes any of that potential off the table and it more than reinforces the Bank of Canada’s conditional commitment and because of that, we saw some additional weakness in the Canadian dollar.”

Copyright © 2010 The Canadian Press. All rights reserved.


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