OTTAWA - The Canadian dollar regained some altitude Friday after a four-day tailspin, but market watchers say the currency will likely continue to fluctuate sharply for some time to come.
In mid-afternoon trading, the loonie was up more than a cent and a half from the previous day's close, at 103.02 cents US. Friday's increase came after declines every day this week, continuing a downward trend that began last week after the dollar hit a record high.
The currency had its steepest one-day drop Thursday when it plunged almost two cents to close at 101.51 cents US amid turmoil in the credit markets and worries about the harm that a high Canadian dollar may have on the economy.
The currency is down from its record intraday high of 110.3 cents US, hit on Nov. 7 when oil prices approached US$100 a barrel. Oil prices have retreated since then, along with the loonie.
Some expect the dollar to regain some of its strength in the coming weeks, partly fuelled by oil prices showing some gains.
"There's been a huge correlation between oil and the Canadian dollar this year. It's always there, but we've really seen it moving tick-for-tick,'' said Scotia Capital currency strategist Camilla Sutton.
Part of the dollar's freefall this week can also be chalked up to heightened risk aversion, she added. That's the economic concept of opting for a lower payoff that comes with greater certainty, rather than a potentially higher payoff that carries more risk.
So, in the case of the Canadian dollar, investors have recently been putting their money into relatively safe places, such as fixed-income investments, mutual funds and gold. Sutton said that tends to strengthen the greenback.
"Since July, this has happened a few times where we've seen U.S. dollar strength on the back of risk aversion,'' she said. "However, this time, the reaction by the Canadian dollar has been the strongest.''
She expects the loonie will eventually regain some of the strength it showed in early November.
BMO Capital Markets' economist Sal Guatieri observed the see-sawing of the loonie would be cause for alarm if its recent run-up hadn't been almost as quick.
"With trade flows and the economy likely to sag, it may take another assault on the greenback and a run-up in commodity prices for the currency to even think of reclaiming its previous peak,'' Guatieri said in a note.
During the last five days, the loonie was down 5.5 per cent and was the worst performer out of a group of 16 major currencies, Guatieri wrote. The yen was the strongest performer.
But Avery Shenfeld of CIBC World Markets said the Canadian dollar's drop this week "only takes back a fraction of its outsized gains earlier in the year, leaving it still with the sharpest year-to-date appreciation.''
Other factors have been at play to slow the sharp appreciation of the loonie, which started the year at 85.81 cents US.
A senior official of the Bank of Canada said this week the dramatic rise in the currency is putting Canada's economic growth in peril.
And on Thursday, Statistics Canada announced manufacturing sales declined 0.9 per cent in September, the same month the Canadian dollar achieved parity with the greenback for the first time since 1976.
Also hitting the loonie Thursday were rising worries about credit markets as investors piled into government bonds and treasury bills, resulting in the Bank of Canada and the U.S. Federal Reserve pouring money into the financial system to defend overnight lending rates.
Goldman Sachs Group Inc. warned that the slump in global credit markets could force banks, brokerages and hedge funds to cut lending by $2 trillion, possibly triggering a "substantial recession'' in the U.S.
Meanwhile, the December crude oil contract on the New York Mercantile Exchange climbed 97 cents to US$93.40 a barrel.
The loonie was up despite a stronger U.S. dollar, which rose against the euro amid speculation that Washington will leave interest rates alone for now.
