Canadian Dollar Falls to Record Low 63 U.S. Cents

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10/31 09:18 Canadian Dollar Falls to Record Low 63 U.S. Cents (Update2) By Greg Quinn

Toronto, Oct. 31 (Bloomberg) -- The Canadian dollar fell to a record low 63 U.S. cents as investors moved money out of the country because of concern about slowing economic growth, declining exports and falling interest rates.

The currency declined from yesterday's 63.36 U.S. cents, or C$1.5782. The currency set its previous record of 63.09 U.S. cents Aug. 27, 1998, during a financial crisis in Asia, Russia and Latin America.

The currency has fallen 5.5 percent this year against the U.S. dollar, which investors perceive as safer to hold as global growth slows. Terrorist attacks on the U.S. Sept. 11 accelerated a drop in Canada's exports and economic growth, leaving scant reason to hold the currency, analysts said.

``The general risk aversion since Sept. 11 as well as lower commodity prices -- they have not done any favors for the dollar,'' said Dustin Reid, currency strategist at UBS Warburg in Stamford, Connecticut. ``There's no reason why the Canadian economy won't suffer further and why the Canadian dollar won't suffer.''

The dollar's value has been generally in decline for almost half a century. In August 1957, the currency bought as much as $1.06, before it began a slump to about 70 cents in the mid-1980s. The currency rebounded to about 85 cents in the early 1990s, before a 10-year slide to its new low.

Underlying Reason

While events such as falling interest rates, slowing growth and terrorist attacks have hurt the dollar in the short term, many analysts say the underlying reasons for the 50-year decline include Canada's relatively higher taxes, bigger government debt and lower productivity than the U.S.

Some investors argue Canada didn't do enough to encourage productivity, ``supporting (instead) a social network, large government deficits in the 1980s and early 1990s, and a socialist type of safety net in terms of employment insurance that reduced incentives in the Canadian labor market,'' said Harvinder Kalirai, who formulates foreign-exchange and asset-allocation strategy for State Street Bank in Boston, which manages C$18 billion of assets in Canada.

The country's central bank probably won't try to stem the latest decline, analysts said. That's a change of course from the last time the dollar slumped to a record, when the Bank of Canada spent $4.6 billion buying the currency before raising interest rates a full percentage point. The rate increase helped the currency gain 3 U.S. cents in two weeks.

`A Cushion'

The central bank probably won't repeat that reaction, because the sliding dollar will add fuel to the slowing economy by making Canada's exports cheaper, analysts said.

``It's unlikely the bank will be overly concerned,'' said Mario Angastiniotis, an economist at Standard & Poor's MMS in Toronto, before the record was set. ``The weakness in the currency is seen as giving a cushion to the economy.''

Bank of Canada Governor David Dodge said in March that he would only intervene to help the dollar is if there ``were major international crises.''

Earlier this year, some investors bet that Canadian growth would outpace the U.S., enabling the Bank of Canada to leave interest rates higher than in the U.S. Relatively higher rates can boost demand for Canada's fixed-income investments and the dollars needed to buy them. As investors have reversed those wagers the dollar has slumped.

The Bank of Canada has cut rates 3 percentage points this year because of the threat of slower growth, leaving its overnight bank rate a quarter percentage point greater than the comparable U.S. rate.

Shrinking Gap

Many analysts say that rate gap will shrink or disappear as Canadian growth cools further. In the second quarter, the economy expanded at its slowest pace in almost six years.

The dollar has also been hurt as slowing global economic activity cut demand for commodities, which account for 30 percent of Canada's exports. Non-energy commodity prices fell 15 percent in the first nine months of the year, according to Goldman Sachs. In 1998, those prices fell 19 percent in the months before the dollar set its record low.

Along with commodity prices, exports have fallen, reaching a 17-month low in August as demand declined from the U.S. -- Canada's largest customer.

Canada's benchmark Toronto Stock Exchange 300 Composite Index has fallen 24 percent so far this year, prompting some investors to sell the country's stocks for better returns elsewhere. In the six months before the currency touched the record low in 1998, the TSE 300 fell 22 percent.

The Canadian dollar isn't the first currency to drop to a record in the past year against the U.S. dollar. The Australian dollar reached record lows in April and the euro slid to a record in October 2000.

The Canadian dollar's value peaked in mid-July 1864, when it appeared the Union forces were losing the U.S. Civil War, according to the Bank of Canada. At that time, a Canadian dollar bought $2.65.

``I don't think the Canadian dollar is going to turn around if it hits any particular level,'' said Robert Keiser, a currency analyst at MCM in New York. ``What will turn it around is whether global investors become more comfortable with risk.''

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