Ottawa Citizen

Dollar falls on U.S. rate fears

Shopping list of negative indicators send currency to 97.16 U.S.

- BY ERIC BEAUCHESNE

The Canadian dollar continued to lose ground to its rallying U.S. counterpar­t yesterday, sinking to a five-month low of nearly 97 cents U.S. following news of higher-than-expected inflation south of the border, a decline in Canadian business productivi­ty and a drop in world oil prices.

The dollar closed at 97.16 cents U.S., down more than half a cent from 97.73 cents U.S. Thursday, its lowest close since January.

Business productivi­ty, measured as output per hour worked, slipped 0.3 per cent in the first quarter following a 0.7per-cent drop in the final quarter of 2007. The drop left Canadian businesses further behind their U.S. counterpar­ts, whose productivi­ty jumped 0.6 per cent in the first quarter from a 0.2-per-cent gain in the final quarter.

“Canada’s labour productivi­ty was much weaker than that of the United States,” said JP Morgan economist Ted Carmichael, noting that since 2003, productivi­ty growth, which is seen as the key to boosting living standards, has risen in Canada at an average annual pace of just 0.8 per cent, only one-third of the 2.3-percent rate in the U.S.

And the struggling Canadian manufactur­ing sector posted the weakest performanc­e, with its productivi­ty plunging 1.6 per cent.

“This situation must be corrected in the not too distant future … Canadians’ prosperity and standard of living depend on it,” said Desjardins Group economist Benoît Durocher.

The good news for Canadian businesses was that Statistics Canada noted a “slight improvemen­t” in their competitiv­e position against American businesses as Canadian labour costs, when measured in U.S. dollars, fell for the first time in a year.

And there was some good news for the struggling manufactur­ing industry in a separate Statistics Canada report showing that factory shipments rose by a better-than-expected two per cent in April.

While that gain reflected higher prices for petroleum products, there were also real increases in shipments of other products as well.

“With this surprising­ly strong report, it appears that Canadian manufactur­ing activity is off to a blistering start in the second quarter,” said TD Securities economist Millan Mulraine.

Further, manufactur­ers will also welcome the decline in the Canadian dollar, which has been sliding since U.S. Federal Reserve chairman Ben Bernanke two weeks ago signalled grow- ing concern about the threat of inflation.

That threat was underscore­d by news that the U.S. inflation rate rose to a greater-than-expected 4.1 per cent last month, reinforcin­g expectatio­ns the Fed will not cut interest rates further and that its next move will be to start raising rates.

Some analysts feel the U.S. dollar rally is the start of a longer-term turnaround for the deeply depreciate­d currency, which would be good news for Canadian manufactur­ers.

But others warned that the slump in manufactur­ers main export market will continue.

That was reflected in weakness in new orders for Canadian factories in April, which fell two per cent, the third decrease in five months.

“With the strong Canadian dollar and sluggish U.S. demand, we expect the manufactur­ing sector to be less buoyant in the coming months,” said TD’s Mr. Mulraine.

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