Loonie drops after Fed rate hike as investors retreat to U.S. dollars
TORONTO The Canadian dollar slid lower again Thursday, hitting lows not seen in more than two years, a day after the U.S. Federal Reserve raised its key interest rate by three-quarters of a percentage point.
The loonie briefly fell below US74 cents in early trading, according to Xe.com, after crossing the Us75cent threshold at the start of the week, under a trio of closely linked pressures, said Rahim Madhavji, president of Knightsbridge Foreign Exchange Inc.
“At a high level, flight to safety, rising U.S. interest rates, and poor performing stock markets are kind of the key drivers that are making funds go into the U.S. Dollar versus the loonie.”
These pressures have been around for much of the year to chip away at the Canadian dollar, which has fallen from higher than US80 cents in March, but the downward slide has accelerated in recent weeks as optimism over how quickly rising rates might tame inflation fades, said Madhavji.
“What's happened in the market is in the last month or two people have said `hey, we thought this was going to work by raising rates.' And now what they're saying is `it isn't working,' we think they're going to have to get more extreme.”
The prospect of more rising rates was indicated Wednesday by Fed officials who forecast they would further raise their benchmark rate to roughly 4.4 per cent by year's end, a full point higher than they had envisioned as recently as June.
The potential for higher rates in the U.S. makes the greenback more attractive by paying better returns, while putting pressure on stock markets that these days account for about 80 per cent of the movement in the Canadian dollar, said Madhavji.
The close link to equity markets means that the loonie hasn't seen the benefit it otherwise might have from the Bank of Canada also raising rates, and commodity prices still being relatively high, said Shaun Osborne, chief foreign exchange strategist at Scotiabank.
“The CAD has become quite attached to the sort of global risk backdrop.”