Loonie near 89 cents and climbing

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April 27, 2006 by Joseph Krohn

The Canadian dollar is on another tear, rising to a more than 14-year high of nearly 89 cents US and on its way to what analysts expect will be more than 90 cents US this spring, which is good news for some Canadians and bad for others. The loonie hit a high of 88.9 cents US on Wednesday before closing at 88.61 cents, it highest level since late 1991. The increase followed this week’s further quarter-point interest rate hike by the Bank of Canada and its warning that there may be more rate increases to come.

Consumers can look forward to lower prices on imports, including everything from groceries to automobiles, thanks to a soaring dollar, said Paul Ferley, economist at BMO Financial Group.
“Generally, from a consumer’s point of view, it’s advantageous to have the Canadian dollar strengthening,” he said. “Any good that’s imported from the U.S. will cost less with the strengthening of the Canadian dollar.” Major items that will likely be affected include produce and vehicles imported from south of the border, as well as travel to the U.S., Ferley said.
Pricing updates are done regularly in many sectors, which means consumers will probably see the cost of some items, such as produce, come down almost immediately as a result of the strong dollar, he added. But companies that export to the U.S. or produce goods that are priced in U.S. dollars will feel the pinch because they will receive less in Canadian dollars, he said. Avery Shenfeld, economist at CIBC World Markets, which is forecasting the loonie will 90.5 cents US this spring, said that will mean more job losses for workers in those industries, especially in the manufacturing sector, where close to 200,000 jobs have disappeared since the loonie began its climb three years ago from a record low of about 62 cents US.

“Long-term, Canada’s ability to sustain such a strong currency rests on the degree to which job gains in resources, construction and services can offset the hemorrhaging in the manufacturing sector,” CIBC World Markets said in a currency analysis. “So far, that’s been a piece of cake, but that’s against the background of a U.S. boom,” he noted. “A slowdown in U.S. industrial and consumer activity in 2007 should open up more wounds for Canada’s non-resource exporters, and higher Canadian interest rates will, at the same time, be eating into domestic demand.”
Unlike the resource sector, which has been cushioned from the impact of the surging loonie by soaring commodity prices, especially for energy, manufacturers have been squeezed by the combination of increased global competition which has prevented them from offsetting the strong dollar or their soaring energy costs. “Every time the rates go up it is much more expensive to do business. With the dollar rising in hot pursuit, it’s a double whammy,” said Werner Knittel, B.C. vice-president of Canadian Manufacturers and Exporters. “It is terrible news the manufacturing sector. Every cent that the dollar goes up comes right off the bottom line of companies that are selling into the international marketplace.” And it’s not just manufacturers who are feeling the heat from the hot currency.

The strong dollar, along with high gasoline prices and concerns about border security measures, are being blamed by the domestic tourist industry for a drop in visits to Canada by Americans, which hit an all-time low earlier this year.

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