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The loonie topped $1.03 (U.S.) on Friday, driven by surging crude prices and an inflation report that further dimmed the odds of an interest rate cut.

The surging Canadian currency climbed as high as $1.0358, its highest level since June, 1974, in the wake of a government report that showed inflation reached a 16-month high. At last check, the loonie was trading at $1.0355, up 85 basis points from Thursday's close of $1.027.

A report showing that Canada's annual inflation rate hit a 16-month high of 2.5 per cent in September, as consumers paid more at the pumps, was moving the currency on Friday. The core rate, which strips out the most volatile components in the index, rose at a 2-per-cent pace, the slowest rate in 13 months but still a notch above economist expectations.

David Powell, a currency strategist at research firm IDEAglobal in New York, said the good news below the surface was that the year-over-year inflation measure, which is what central bankers tend to focus on, fell to the bank's target of 2 per cent.

“Normally, a higher inflation reading would increase the value of a currency with thoughts of higher interest rates but we know that this will not happen in Canada, certainly not before [Bank of Canada governor] David Dodge steps down in January,” Mr. Powell said in an interview.
In its quarterly monetary policy review released Thursday, the Bank of Canada very clearly — and unusually — indicated that interest rates will likely remain on hold throughout 2009. The bank cited a surging loonie, a weak U.S. economy and credit tightening. In addition, it warned that its economic growth forecast is subject to a “slight tilt” to the downside.

Mr. Powell expects the loonie will drop below parity in the next six to twelve months. “The fundamental case for further gains for the Canadian dollar is rather shaky. These gains will likely not be extended,” he said.
The dollar was getting some support from oil prices, which reached a record $90.02 (U.S.) a barrel Thursday. The loonie, which has been dubbed a petro-currency, often rises alongside crude.

The loonie hit parity with the U.S. dollar for the first time since 1976 on Sept. 20. The currency fell to a record low of 61.79 cents on Jan. 21, 2002

What is the prognosis for the USD? To hold or not to hold is the question some investors and market players are interested to know. Would a Democrat presidency bring back better times? I'm not as optimistic.

Money market traders dumped the US dollar when the communique of the Group of Seven finance ministers contained no mention of problems stemming from the brittle greenback.

The Australian dollar also dipped sharply in morning trade, punished because of the weakness in US equities. But the local currency moved higher later in the day, with traders keen to snap up any dip of the Australian dollar against its US equivalent.

"I guess there's a feeling that we are going to see some more protracted falling in the US dollar," said ANZ's senior currency strategist, Tony Morriss.

With the US economy teetering on the brink of recession, an interest rate cut by the US Federal Reserve this month is considered a near certainty.

A rate cut would be another big blow to the US dollar. Yesterday it hit $US1.43 per euro, its lowest since the European currency came into existence.

(Hugh Giddy, a portfolio manager at Cannae Capital Partners)said that although the latest sell-off was only a "sneeze" at this stage, it could still develop into a cold given that the market was vulnerable because of the high level of investor optimism and the global economy had underpinned company profitability. But the local market fared better than its Asian counterparts yesterday. Hong Kong's Hang Seng index fell 3.4 per cent, and Japan's Nikkei dropped 2.2 per cent. Last night the sell-off continued in European markets in early trading with London's FTSE index down 1.6 per cent.

"The fact is that the market looks expensive and the 20-year anniversary [of Black Tuesday] gives investors something to think about," said Paul Fiani, the managing director of the boutique fund manager Integrity. "At some stage the market is going to have to take its medicine."

Mr Fiani said the prospects of a sharp correction or lower returns from stocks over the next few years had heightened in recent months.

A Nomura Australia equities strategist, Eric Betts, said the market was unlikely to stage a sharp recovery over the next few days, but rather could be expected to fall further before value buyers returned. "The volatility will continue for the foreseeable future," he said.

The Canadian dollar soared back to another 33-year high Thursday morning, riding a thermal generated by a jump in oil prices fanned by supply concerns and mounting concerns about a possible Turkish incursion into Iraq, along with a renewed slide by the U.S. greenback.

The loonie topped the $1.04 (U.S.) mark between 8 a.m. (EDT) and 9 a.m. (EDT), according to George Davis, chief currency technical analyst at RBC Capital Markets in Toronto, although it has since slipped back to a little over $1.03. The early-morning high was up 0.8 cents from the currency's official Bank of Canada's closing level Wednesday and marked its highest level since April, 1974.

“We're playing a bit of catch-up from yesterday, but the real story is that oil has moved much higher after the inventory report yesterday,” said Camilla Sutton, a currency strategist for Scotia Capital in Toronto. “And we're having broad-based U.S. dollar weakness.”

U.S. prices for crude oil move back to within shooting distance of last week's record of $90.07 (U.S.) a barrel, with the December contract on the New York Mercantile Exchange rising as far as $88.99, before slipping back to $88.37, up $1.27 from Wednesday's finish. As well, Brent crude hit a record $86.28 in London, before easing off to $85.58, up $1.21.

Oil started rising again Wednesday after the U.S. energy department revealed that far from growing by 960,000 barrels last week, as Wall Street had expected, crude inventories in fact dropped by 5.3 million barrels.

The Canadian dollar may also have benefited from a seemingly conciliatory speech made Wednesday evening by Alberta Premier Ed Stelmach. He appeared to indicate his government is backing away from the wholesale adoption of recent recommendations for a 20 per cent hike in royalties and other levies it charges energy companies.

“I think that's helping,” Ms. Sutton said in a telephone interview, but she added that until the Alberta premier provides more details of the government's plans on this front, set for this afternoon, “there are still risks around that.”

The Canadian dollar, already the world's best-performing major currency this year, rose as high as $1.0717 (U.S.) Friday from Thursday's close of $1.0512. It settled Friday's session at 107.04 cents.

The currency has soared 25 per cent this year against the greenback — and almost 7 per cent in the past month alone. The gains are most striking against the U.S. dollar, but the loonie is also stronger against every single major world currency this year, including the euro, the yen and the Brazilian real.

Royal Bank of Canada, RBC, the largest international trader of Canadian dollars, raised its forecast for the currency on Friday, saying it will appreciate further to around $1.08 before declining below parity in the second half of next year.

The loonie's streak is being partly fuelled by higher oil prices. Oil climbed $1 Friday after closing at a record Thursday amid concerns about tight supply.

The dollar was technically worth as much as $2.78 in the late 1800s, but that's largely because during Canada's early history the value of the currency was either pegged to the price of gold or regulated by the government.

It wasn't until 1950 that the dollar began trading freely on global markets, according to the History of the Canadian Dollar, written by James Powell. The Bank of Canada recognizes the 1957 mark as the official record.

OTTAWA - The loonie took its steepest plunge in three and a half decades Monday, but analysts aren't ready to declare an end to the era of an overvalued currency.

Once again, the Canadian dollar has been sideswiped by the volatile realignment of world currencies. Last week, the global churn took the loonie to a high of $1.10 (U.S.), but Monday, the move was in the opposite direction, with traders shaving more than 2 full cents off the currency.

It closed at $1.0322, down from 1.0607 on Friday. While the Bank of Canada was closed Monday in lieu of Remembrance Day and did not provide official exchange rate figures, according to Bloomberg and Reuters it's the biggest dip since 1971 - even though nothing of consequence happened in Canada's economy Monday.

“Gold is down, oil is down sharply. And we were overcooked last week. That's why we are falling more than you'd expect,” said George Vasic, strategist for UBS Securities Canada Inc. “I would view this simply as a trading reversal based on what was simply a trading overshoot, just for the two weeks prior.”