OTTAWA - The Canadian dollar dropped Wednesday as speculation continued to swirl about possible interest rate cuts, fuelled by ebbing inflation and a decline in September's domestic retail sales figures.
The loonie closed down 0.72 of a cent to 101.25 cents US, after going as low as 100.75 cents US, even as the U.S. dollar hit a record low versus the euro.
On Tuesday, the loonie had gained 0.42 of a U.S. cent.
"Trading is extremely volatile at the moment,'' said Steve Butler, director of foreign exchange trading at Scotia Capital Markets.
"I don't remember when we've seen such an extended period of volatility . . . obviously with the subprime woes and the credit concerns and the falling equities, volatility is up quite sharply.''
The euro, the pound and other currencies -- including the loonie -- had all climbed steadily against the greenback since August amid fears for the health of the U.S. economy, stoked by the crisis in the housing and mortgage industries.
Surging oil prices have driven up commodity-backed currencies such as those of Canada, Australia and New Zealand. On Wednesday, oil prices nudged closer to the US$100 a barrel mark, rising to a record high above US$99 a barrel in early trading before slipping back around $97 by midday.
Finance Minister Jim Flaherty told a parliamentary committee Wednesday that problems associated with Canada's high dollar are diminishing, although there is no quick solution on the horizon.
Flaherty's remarks came as the Bank of Canada injected $600 million into capital markets following a similar move Tuesday to the tune of $815 million. The central bank has periodically done this since the global credit crunch began to emerge in early August. The recent cash infusions follow a $1.6 billion addition last Thursday.
Bank of Canada spokeswoman Julie Rocheleau said Wednesday's move, and others in recent days, was done to "reinforce the target for the overnight rate.''
Meanwhile, fewer sales by new-car dealers pushed Canadian retail sales down slightly by 0.2 per cent in September to an estimated $34.4 billion. While Statistics Canada said retail sales have generally risen at a rapid clip since 2004, it was the third decrease in overall sales since May 2007.
Claude Bilodeau, who wrote the Statistics Canada report, said the September figures don't draw a direct link between the stronger Canadian currency and a downturn in new automotive sales.
The Canadian dollar didn't reach parity with the U.S. currency until the very end of September. Since then, the loonie has been largely trading well above US$1 -- giving consumers an incentive to cross the border to shop and putting Canadian retailers and their suppliers under pressure to lower their price tags.
"We do expect, hopefully, a clearer signal with October figures,'' Bilodeau said. "Unfortunately, it's too early to say anything ... I was interested, or looking to prove, the impact of the dollar, but my numbers don't show that yet.''
However, Butler said it's likely Canadians took advantage of their stronger currency and bought cars south of the border, which factored into the decline in new car sales.
"There's definitely a case for individuals going and doing their cross-border shopping, whether its automobiles or whether its anything else, given it's difficult for retailers to adjust as fast as the market,'' he said.
Other analysts suggested the loonie's impact on retail sales shouldn't be overstated. TD Bank economist Pascal Gauthier noted that furniture, home furnishing and electronics' sales fell 2.2 per cent, while clothing and accessories declined 0.8 per cent in September.
"The talk of late has been all about the Canadian dollar, a challenge for retailers. But prices for these items have been declining for some time, reflecting a longer-term trend of cheaper imports from emerging markets and better technology,'' Gauthier wrote in a note to clients.
Excluding sales by dealers of new, used and recreational vehicles and auto parts, retail sales increased by 0.1 per cent in September. Sales in the automotive sector declined 0.7 per cent during the month, primarily due to a 1.3 per cent decrease in sales by new-car dealers.
Increases were recorded in food and beverage stores (0.6 per cent), general merchandise stores (0.4 per cent), pharmacies and personal care stores (0.4 per cent) and building and outdoor home supplies stores (0.1 per cent).
In constant dollars, total retail sales declined 0.5 per cent in September, indicating that there was a slight price effect.
Early Wednesday, the U.S. dollar sank to a new low against the euro on pessimism about the American economy and speculation that Washington will soon cut interest rates again.
The euro spiked to US$1.4855 before retreating slightly to $1.4843 in afternoon European trading -- topping $1.48 for the first time. The U.S. dollar also hit a two-year low against the Japanese yen.
The greenback has been hurt by interest rate cuts -- which can be used to jump-start an economy but can also weaken a currency as investors transfer funds to countries where they can earn higher returns.
