Canada’s dollar is near an 11-year low, hammered by Asia’s financial turmoil and sliding commodity prices, but economists say the situation is a long way from a crisis and may reverse itself by next year.
“This is not a currency crisis. It’s not even a currency problem of the sort that we saw in 1995. What you have is a currency languishing at levels that had not been anticipated,” said Tim O’Neill, chief economist at Bank of Montreal.
The Canadian dollar has been on a downward spiral for several weeks. On Thursday it reached a 2 1/2-year low of 70.10 U.S. cents, near levels unseen for 11 years.
The dollar came close to breaching a low of 70.09 U.S. cents, set in 1995 when it was hit by fallout from the Mexican peso crisis. The dollar traded at 70.25 U.S. cents in late trading Friday.
The currency’s slide has prompted an aggressive, often unsuccessful defense of the dollar by the Bank of Canada. On Tuesday, the central bank hiked interest rates to end “persistent weakness” in the currency.
The rate hike failed to halt the dollar’s slide, with the Bank of Canada buying dollars on the open market in the following three days to support the dollar.
Analysts blame most of the currency’s weakness on the crisis in Asian financial markets, which drove investors toward big, “safe haven” currencies like the U.S. dollar and German mark.
The crisis has also lowered forecasts for Asian growth, which has hurt commodity prices. Canada is a large exporter of commodities such as lumber and metal, and its currency often mirrors changes in global demand for commodities.
The slide in the currency has been compared to a similar drop in early 1995 caused by the Mexican peso crisis. The Canadian dollar then earned the nickname the “Hudson’s Bay peso.” The Bank of Canada was forced to hike interest rates 250 points to end the sell-off.
Analysts said that economic and political fundamentals in Canada were better now than in 1995 and that the Canadian dollar would strengthen in coming months.
“If you scratch beneath the surface, the picture that emerges for the currency is a lot more bullish than the headlines might suggest,” said Rob Palombi, senior fixed-income analyst at MMS International.