TORONTO - The Canadian dollar fell dramatically Thursday, falling more than a cent against the American greenback on evidence that Canada's economy began to slide in November and more subprime woes in the United States are on the horizon.
After rising strongly in the past week, the loonie fell 1.06 cents US to close at 99.62 cents US in Toronto on Thursday.
Earlier in the day, the loonie fell by as much as 1.55 cents US after Statistics Canada reported that the Canadian economy barely edged forward in November, rising 0.1 per cent, and production of goods fell 0.2 per cent, from October.
Output from the depressed Canadian manufacturing sector decreased 0.3 per cent in November, reaching its second-lowest level since the beginning of 2007.
As it has for most of the year, the Canadian economy was able to keep its head above water thanks to consumers and the services sector, which advanced 0.4 per cent and 0.2 per cent respectively in the month.
"The Canadian dollar's reaction was large, so it was a bit of a surprise because the gross domestic product (report) wasn't really that far from what economists were expecting,'' said CIBC senior economist Avery Shenfeld.
"You could also look at this in the context of the loonie having gained that ground in the last few days. It was a correction and might not all be due to the GDP report.''
After falling below 97 cents US last week, the loonie surged past parity this week to close at 101.31 cents US on Wednesday, largely in reaction to the Federal Reserve's aggressive attack on interest rates in an attempt to forestall a U.S. recession.
The Bank of Montreal said the November gain -- half as big as the growth registered in October -- supports the view that the Canadian economy is braking and will likely record a 1.5 per cent growth rate in the fourth quarter, down from 2.9 in the third.
The bank's senior economist, Sal Guatieri, noted that with U.S. demand for Canadian products easing further, exports of Canadian manufactured goods will apply an even greater drag on the economy going forward, as will a slowdown in construction.
"With the U.S. economy likely to contract modestly in the first half of the year, Canada's economy will brush up against bigger icefloes this year,'' he said.
There was other bleak news from south of the border that contributed to loonie sell-off, including the rating downgrade of a major American bond insurer.
The bond insurers, or monolines, offer a potential lifeline to banks affected by subprime woes, providing some insurance against credit losses. If the monolines are in trouble, that means less available relief for financial institutions already struggling with losses related to bad subprime mortgages.
As well, initial U.S. jobless claims for the week ending January 26th jumped to 375,000 from 306,000 in the week prior, further indications the American economy is slumping.
But Shenfeld does not believe the U.S. has yet slipped into a recession, saying other indicators, such as factory orders and household spending remain on the positive side of the line.
Still, following the U.S. Federal Reserve's 125-point slashing of interest rates in the past two weeks, Shenfeld believes the Bank of Canada will have little choice by to speed up their easing of rates as well, forecasting a one percentage point drop in the by the end of June.
"One could have argued they should have cut half-a-point in January, but as it gets evidence of the U.S. slowdown, I think the bank will move up the pace for its next rate cut (on March 4),'' he said.
The central bank's senior deputy governor Paul Jenkins told a Commons committee on Wednesday that the bank regards a range of about 90 to 98 cents US for the loonie as justified by the fundamentals, such as commodity prices.
He said the bank would likely intervene if the dollar deviates too far from the range.
