(CP)
Thursday, March 20, 2008

TORONTO—The loonie had its biggest single-day plunge in nearly 46 years yesterday, falling 2.19 cents against the American dollar as a bleak outlook for the world’s economies also pushed down the price of key commodities such as gold and oil.
Canada’s dollar ended the day at 98.49 cents (U.S.)—the lowest close in a month. The currency also had dropped sharply on Tuesday and continued lower throughout yesterday’s session, but the momentum picked up late in the afternoon.

The last time the dollar had fallen this much was in May, 1962 when John Diefenbaker’s Conservative government pegged Canada’s currency at 92.5 cents (U.S.), plus or minus one cent, after dollar volatility raged amidst a recession.
But except for brief periods, the Canadian dollar has traded according to market forces. For more than 40 years, it was below par with the American dollar but that changed last fall with the loonie spiking to a record 110.3 cents (U.S.) in mid-November.
“The environment for the Canadian dollar has been eroding for some time and, if anything, where we are now is where we should be,” said David Wyatt, senior currency analyst at RBC Capital Management.
“After [Tuesday’s] Fed rate cut, and the euphoria that followed it, people are sitting back and realizing that the outlook for the U.S. economy is still fraught with risk.”
On Tuesday, Wall Street rallied to its biggest gain in five years after the U.S. Federal Reserve slashed a key interest rate by three-quarters of a point.
The action was designed to lower borrowing costs and boost spending by U.S. consumers and businesses, and thus increase economic activity.
But by midday yesterday, much of that excitement had begun to fade and the markets started to tumble.
New York’s Dow Jones industrials fell 293 points while Toronto’s S&P/TSX composite index fell more than 400 points.
Wyatt said cutting the interest rates only would handle part of the broader economic problem.
“Even if they manage to get through the current liquidity crisis, the housing downturn is going to continue to linger, and the Fed expressed clear concern about that,” he said.
Yesterday, commodity prices fell amid concerns that the troubles in the U.S. will spread throughout the world economy, including Asian countries that have been big buyers of Canadian resources.
Meanwhile, the April crude oil contract on the New York Mercantile Exchange lost 4.5 percent—its biggest one-day decline since 1991—dropping $4.82 to close at $104.60 (U.S.) a barrel.
The slide came despite a report from the U.S. government that oil, gasoline, and heating oil inventories were smaller than expected last week. Usually, smaller inventories tend to push up prices.
Gold was slammed with its own biggest single-day drop since June, 2006, less than a week after breaking the $1,000-an-ounce barrier for the first time and just two days since hitting a new high.
The price of bullion tumbled $59, or 5.9 percent, to finish at $945.30 (U.S.) an ounce. On Monday, gold touched a record high of $1,034 an ounce.
Wyatt said RBC Capital Markets expects the loonie to stick around parity at least until the middle of the year, when it will “weaken off consistently.”
“We just don’t think the U.S. dollar is going to be firm enough to let the Canadian dollar weaken” in the short-term, he said.
“They’re going to battle each other to a standstill.”