US dollar close to rare parity with Canadian loonie

loonie specs
Canada’s loonie hits parity with U.S. dollar
Greenback also reached a new record low against the euro
By the Associated Press

The dollar took another fall on currency markets Thursday, reaching one-to-one parity against the Canadian dollar for the first time in 30 years and falling to a new low against the 13-nation European currency.

The dramatic half-point cut in U.S. interest rates announced this week, while aimed at shoring up U.S. credit markets, also had the effect of further weakening the dollar versus other currencies by reducing the cash yield on dollars. A lower dollar can make travel more costly for U.S. residents and can also pose the risk of making imported goods more expensive over time.

But for Canadians, it could mean more shopping trips to the U.S. as their loonie reached parity with the U.S. dollar for the first time since November 1976. That means one U.S. dollar now buys one Canadian dollar. The loonie rose sharply against its U.S. counterpart this week after the Federal Reserve’s surprising rate cut. The spreading interest rates between U.S. and Canada, which kept its equivalent rates stable, could make America’s northern neighbor a more attractive place for German, Japanese, American and other foreign investors to put their money.

The euro breached the $1.40 barrier against the dollar on Thursday. That level had long been seen as a key benchmark in terms of solidifying the euro’s position on currency markets and giving it momentum toward becoming a reserve currency of choice — a position long held by the now-weakening dollar.

The 13-nation euro bought as much as $1.4064 in morning trading in Europe before falling back slightly to $1.4040, above its previous high Wednesday night of $1.3987, and more than the $1.3964 it bought in late New York trading.

It is about time for inflation to be calculated on real costs.Just to say the loonie buys more because of its current high value retail thus reducing cost is eroneous. In order for the loonie to reflect a saving for consumers, business has to pass on its savings on inventory. This they never do. To say the market prices reflect the prices at the retail level is a lie. There are all sorts of information available to show this theoretical reasoning cost reduction is not representative in the the retail pricing. For example we can show the yin and yang of pricing benchmarks for fuel in British Columbia. Retail regular gasoline in Abbotsford BC is 90 cents a liter, on Vancouver Island it s as high as $ 1.12 a liter. So which figure is utilized when calculating inflation and what it is benchmarked to. For those on fixed incomes there are other depletions that affect their welbeing.

Governments are the worst; they imposes care home rent increases of 10% for independent living costs, raise Medicare premiums 6%, and include previously non-taxable items as now subject to sales tax. On the average of $ 100 this assault on income is $ 28/100. So Because fuel was $ 1.55/liter a year ago and only $ 1.05 this year does not mean inflation has disappeared or gone down. Ideal inflation as per the BOC is 2.5%, Therefore incomes should escalate at 5% to manitain the values and allow families to grow at a minimum standard.

Factors Driving the 6-month Rise in the Canadian Dollar

BNN economist Linda Nazareth points out the four major reasons the loonie is going up and unlikely to encounter any significant obstacles in the near term.

1. US Dollar Weakness.
Both US currency and US economic fundamentals remain weak and show no signs of strengthening in the near term at all. The national debt and both deficits are rising, the money supply is growing, and the Fed will not be raising interest rates as long as unemployment remains low and the economy shows no signs of real growth.

2. Commodity Prices Rising.
Canada is a resource nation and the Canadian dollar is a commodity currency. Often the loonie is driven by energy prices, but recently it is gold and gold’s new highs (today breaking through $1070/oz.) that have the loonie spiking higher. You might want to take a look at the world’s largest gold stocks or Canada’s top 20 gold stocks.

3. Improving Canadian Fundamentals.
The Canadian economy is bouncing back. Especially following last Friday’s positive jobs report, investors and traders are coming back into the Canadian dollar as opposed to other currencies. Further, Australia’s recent rate hike suggests to some that the Bank of Canada might be following behind, if not soon, at least sooner than mid-2010. If you’re bullish on the Canadian economy in general, take a look at Canada’s income trusts for monthly yields often tied into the energy and real estate sectors.

4. Reserve Currency Diversification.
Many central banks around the world are diversifying the currencies they keep in reserve. Rather than hold a majority of their wealth in US dollars, they are opting for currencies that pay more in interest – such as Australia, and now perhaps Canada, too, for the reasons laid out above.

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