"The rise in value of the Canadian dollar "is an energy story," said Busch. With crude oil futures trading at more than $83 U.S., investment capital is pouring north to help extract oil from so-called tar sands, also known as oil sands, in the province of Alberta.
"The average cost to produce a barrel from tar sands is $40 to $45," Busch said. The current world oil price "puts oil development from tar sands on steroids."
Go crazy: Dollar sinks below loonie
Bill Barnhart | Market report
September 21, 2007
They broke out the Moosehead beer Thursday in the Chicago office of BMO (Bank of Montreal) Capital Markets.
For the first time in nearly 31 years, it look less than one Canadian dollar to buy one U.S. dollar. The loonie, as the Canadian currency is known, broke the greenback.
"We've got Canadian beer, Mexican salsa and American-made chips," said Andrew Busch, global foreign exchange strategist at BMO.
"It's a real milestone number," said Gary Klopfenstein, senior managing director for currency management at Mesirow Financial in Chicago.
"The force and the momentum behind the market, with interest rates and oil, there's an awful lot of inertia taking the U.S. dollar lower in Canada right now."
Also Thursday, the euro broke above $1.40 for the first time, as financial markets continued to adjust to Tuesday's surprise cut of half a percentage point in U.S. interest rates by the Federal Reserve.
It was easy to blame the weakening dollar on the Fed, especially among Fed critics who say Tuesday's rate cut will hurt the U.S. economy and the standing of America in the global economy, as reflected in the value of the dollar. But there's more to the story.
There's no doubt that in the last three days the Fed cut accelerated the long-standing trend of dollar weakness. Cutting short-term U.S. interest rates while other major countries are holding rates steady naturally makes dollar-based deposits relatively less desirable in global money markets.
If the dollar continues to weaken, as many analysts and traders expect, imports sought by U.S. consumers could cost more, increasing inflationary pressures here and further taxing consumers already facing higher energy costs.
But the Federal Reserve rate cut is just one factor in recent currency moves between the U.S. and its principal trading partners.
"There are times when interest rate differentials [among nations] drive currencies. This year has generally not been one of them," said Greg Anderson, director of foreign exchange strategy at ABN Amro in Chicago.
The rise in value of the Canadian dollar "is an energy story," said Busch. With crude oil futures trading at more than $83 U.S., investment capital is pouring north to help extract oil from so-called tar sands, also known as oil sands, in the province of Alberta.
"The average cost to produce a barrel from tar sands is $40 to $45," Busch said. The current world oil price "puts oil development from tar sands on steroids."
Regardless of currency exchange rates, investing in Alberta is a bullish trend, boosting demand for the loonie.
Indeed, the robust growth of economies around the world has been putting upward pressure on oil prices, quoted everywhere in U.S. dollars, and downward pressure on the dollar, even without a Fed interest rate cut.
The growth of international economies spells trouble for the dollar for a more complex reason that puts the Fed in an ironic position, said Anderson.
He noted that the dollar rallied against major currencies in early August, when fears about subprime mortgage lending and a credit crunch in the U.S. reached a fever pitch. The threat to the U.S. economy from a sudden lending crisis appeared to drive the U.S. dollar higher.
This seems like an odd fate for the dollar. But the move indicated that U.S. investors had grown skittish and were investing fewer dollars in international investments, notably emerging markets funds. This nervousness resulted in fewer dollars flowing into countries such as Brazil, Russia, India and China, the so-called BRIC nations that have become major players in currency markets.
The BRIC nations have been converting about a third of their dollars into euros to diversify the currencies they hold, Anderson said.
After the Fed cut rates Tuesday, U.S. investors quickly resumed their love affair with emerging markets funds, driving dollars into the hands of nations that just as quickly returned to converting their dollars into euros.
The amounts involved in this dollar selling are about $15 billion a month, on top of another $15 billion a month being sold by speculators, Anderson said.
"The reason the dollar is losing ground is because equities are rallying," he said. "We're piling money back into emerging markets."
In other words, more optimistic U.S. investors, responding to a market-friendly interest rate cut by the Federal Reserve, generate a cheaper dollar and criticism of the Fed.
Moreover, in the short run, currency movements can be self-fulfilling.
"I think the move above $1.40 in the euro is going to continue that expansion" into international equities, said Klopfenstein.
"There will be heightened volatility. When everybody can't come up with a reason for the dollar to go up, it probably will."
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bbarnhart@tribune.com
http://www.chicagotribune.com/business/chi-fri_barnhartsep21,0,6422707.s...
