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Home World The loonie has fallen to its lowest level in almost two years — here’s why

The loonie has fallen to its lowest level in almost two years — here’s why

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Top 3 best financial News: The Canadian dollar fell to an almost two-year low on Friday as investors around the world weighed in on the economy’s deteriorating prospects and raced to safety for the US dollar.

At one point Friday morning, the Canadian dollar was trading at just 75.15 cents. This is the currency’s lowest level since October 2020.

Looney is down about half a cent from Thursday’s close. This is the latest day in a string of declines for the Canadian currency. Looney fell more than a cent on Tuesday when data from the US showed the country’s core inflation rate was still headed in the wrong direction.

It’s not often that one country’s currency plummets because of another country’s economic data, but given how big problem inflation is, not right now.

Stubbornly high inflation in the US makes it more likely that the country’s central bank will have to raise interest rates more aggressively than ever before. The US Federal Reserve is set to raise its benchmark interest rate by at least 75 basis points to 3.25% next week.

The pricing of investments pegged to the Federal Reserve rate suggests that investors believe US bank rates will eventually rise to 4% or 5%.

“Rates will peak higher than expected a few months ago and last longer than originally expected,” said Audrey Child-Freeman, forex strategist at Bloomberg Intelligence. “At some point, the market will be looking at the Fed’s next cycle. [of rate cuts] But this is far. ”

As investors expect, a Fed rate of 4.5 next year will be much higher than the Bank of Canada is likely to achieve, which is why the current gap between the two countries is widening.

Impact of rate hikes on currencies

All things being equal, a rate hike will make the country’s currency more valuable. Because it increases the value of foreign investors depositing money there. By doing so, they can get higher returns. This rule of thumb now applies even more than usual, as the US dollar is considered the safest place to store money in uncertain times.

Adam Button, the chief currency analyst at forex firm ForexLive, said: “The US dollar is a preeminent safe haven asset and the US economy is much stronger than anywhere else, so there is an absolute money flood.

Looney looks like he’s taking a swan dive. But the US dollar, by which most Canadians measure it, has fallen.

Another reason for Looney’s relative weakness is that commodity prices such as oil and gold are softer as the global economic outlook deteriorates.

“Commodities are weak, mainly as the market is (eventually) approaching the fact that the outlook for global demand is bleak,” said Bipan Rai, a forex analyst at CIBC. “This is important for major proxy currencies like the Canadian dollar.”

The price of a barrel of crude oil has fallen about $30 since June, and under normal circumstances that alone would be enough to bring Looney down.

But that selling pressure is exacerbated by what investors think the central bank will do. Canada’s central bank has also been aggressively raising rates, but the hit to the country’s housing market and consumer spending will soon force the central bank to halt rate hikes.

“Until last week, the markets were saying both would hover around 4%,” Button said. “Now the market says the Fed can raise prices, but the Bank of Canada may not.”

If that happens, it’s a recipe for even more money pouring into the US dollar. As such, Button wouldn’t be surprised if Rooney falls below 73 cents by the end of the year.

“Canadian people may not fully realize how bad things are,” he said.

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