OTTAWA - The Canadian dollar was neck-and-neck with the American greenback on Tuesday, overtaking it in the afternoon after briefly falling below parity because of slumping oil prices and hints of coming interest rate cuts.
The loonie traded as low as 99.97 cents US near 3 p.m. EST, then bounced and traded a few minutes later at 100.27 cents.
It ended the volatile day off 0.37 of a cent to 100.50 cents US, continuing a downward trend that has seen it steadily decline since topping out just above 110 cents US on Nov. 7.
Light, sweet crude for January delivery was down sharply Tuesday on the New York Mercantile Exchange, dropping US$3.28 to settle at $94.42 a barrel -- nearly $5 below its all-time high of $99.29 set last week.
Weighing on oil prices were signs that OPEC plans to increase production, and TD Bank economist Derek Burleton said the declining price of crude oil brought the Canadian dollar down with it.
"That's tied to both concerns that weaker U.S. economic growth will weigh on oil demand at a time when OPEC is likely to raise production,'' he said.
But even given the falling oil prices, analysts said the Canadian dollar is also likely falling back into its natural step with the U.S. dollar after outpacing it for most of the past two months.
"The currency probably went a little too far a little too fast, so this is a healthy correction, probably, for the overall strength of the currency and probably for the economy as well, especially for the exporters,'' said Steve Butler, Scotia Capital Markets' director of foreign exchange trading.
"It just feels like the market wants to see what happens when we get back toward parity.''
The Canadian dollar rose to parity with its American counterpart on Sept. 20 and closed above the greenback on Sept. 28 for the first time in 31 years.
The loonie has risen 70 per cent since hitting an all-time low of 61.79 cents US in January 2002. The especially sharp increase since August, when the U.S. dollar began to fall against most major currencies, has pinched Canadian manufacturers and exporters.
But they shouldn't expect a quick reprieve, said Avery Shenfeld, an economist at CIBC World Markets.
"The manufacturers worried about a strong Canadian dollar -- and the (cross-border) shoppers benefiting from the strong Canadian dollar -- will still be seeing those impacts, even if the currency loses another few cents,'' he said.
But others think a loonie under par with the greenback could reverse a cross-border shopping craze that has seen Canadians flooding the border to buy cheaper U.S. goods.
Derek Nighbor, vice-president of national affairs at the Retail Council of Canada, said Canadian retailers who ordered inventory months ago when the loonie was trading lower might now be better poised to offer deals to shoppers.
Canadian shoppers tired of waiting at the border might also welcome the change, he added.
"You're also hearing more and more stories about hassles at the border, longer waits, people paying their duties,'' Nighbor said.
"A lot of people are coming back and saying, 'you know what, the deals aren't as great as I thought they were going to be.'''
Bank of Canada officials and Finance Minister Jim Flaherty have mused that the dramatic rise of loonie is putting the country's economic growth in peril.
The central bank has been widely expected to cut its key lending rate next week as the economy appears to be slowing more than anticipated, partly due to the effects of the strong currency.
But with the loonie near par with the greenback, the central bank may have more leeway to hold off rate cuts until next year instead of moving Dec. 4 as had been recently rumoured, Burleton said.
"The margin certainly provides the bank with a little bit of wiggle room,'' he said.
The central bank also injected $805 million into capital markets on Tuesday following similar moves last week. The bank has periodically done this since the global credit crunch began to emerge in early August.
