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Canadian Dollar Falls Amid Slowing U.S. Growth, Debt-Limit Delay

Canada’s dollar weakened on concern that the U.S. economy, the main destination for Canadian exports, is losing momentum amid political-stalemate delays to raising the U.S. debt ceiling.

The loonie, as the currency is nicknamed, fell versus 12 of its 16 most-traded counterparts last week as a report yesterday showed the U.S. economy grew less than forecast in the second quarter. A Statistics Canada report showed that the Canadian economy unexpectedly contracted in May by the most in two years. A report next week may show the nation’s employers added fewer jobs in June.

“External shocks are driving the Canadian dollar lower,” said Martin Autotte, managing director and head of capital markets for Quebec at CIBC World Markets in Montreal, in a telephone interview. “The loonie is seen as a peripheral currency that is closely correlated to commodities. In times like these, people are looking for safe havens such as the Swiss franc, and that’s not good for the Canadian dollar.”

The Canadian currency weakened 0.8 percent to 95.52 cents per U.S. dollar in Toronto, from 94.80 cents on July 22. It touched 94.07 cents on July 26, the strongest since November 2007. One Canadian dollar buys $1.0469.

The loonie strengthened 0.9 percent in July against the greenback.

Cross Border

Political issues in the U.S., which takes in about three-quarters of Canada’s exports, also weighed on the currency, as did a drop in commodities such as oil. U.S. lawmakers have failed to agree on the nation’s debt limit, which must be lifted by Aug. 2 to avoid default, according to the Treasury Department.

Crude oil futures slipped 4 percent for the week to $95.85 a barrel. Copper gained 0.2 percent to $4.4795 a pound on the Comex in New York. Commodities are Canada’s biggest export.

Canada’s economic output shrank 0.3 percent in May to C$1.26 trillion ($1.32 trillion) on a seasonally adjusted basis, after being little changed in April and gaining 0.3 percent in March, Statistics Canada said yesterday in Ottawa. Economists in a Bloomberg survey forecast the economy would grow 0.1 percent, based on the median of 24 responses.

‘Pressure Off’

The GDP report “takes the pressure off the Bank of Canada to raise rates,” said Rahim Madhavji, president of Knightsbridge Foreign Exchange Inc., in a telephone interview from Toronto. “Higher rates are inevitable, but the report allows the Bank to pursue a more stimulative policy for now.”

Bank of Canada Governor Mark Carney said July 20 the central bank won’t be “mechanical” in raising rates during the recovery, because of the risks posed by a strong currency and slow U.S. growth. The central bank published a note that day that said interest rates can remain below their long-run average even after the economy recovers, if economic “headwinds” are slowing growth.

Yields on two-year Government of Canada bonds fell 10 basis points to 1.39 percent for the week, pushing the price of the 2 percent note due in August 2013 up 19 cents to C$101.19. The yield on the 10-year note fell 15 basis points to 2.78 percent.

U.S. gross domestic product rose at a 1.3 percent annual rate following a 0.4 percent gain in the prior quarter that was less than previously estimated, Commerce Department figures showed yesterday. The median forecast of economists surveyed by Bloomberg News called for a 1.8 percent increase.

Economic Ties

“What we saw with the U.S. GDP numbers is a shock to the system,” Madhavji said. “The Canadian and U.S. economies are tied at the hip, and the drop in the loonie is really evidence of this.”

The impasse between U.S. President Barack Obama and House Speaker John Boehner spurred some investors to predict the U.S. will lose its AAA credit rating. Julian Jessop, chief international economist at Capital Economics Ltd., predicted in a research note yesterday that a one-level downgrade of the U.S. rating to AA is “the most likely outcome.”

“People are lumping Canada and the Canadian dollar with the U.S., and right now there’s a negative connotation to anything connected with North America as long as the situation in Washington hasn’t been resolved,” said CIBC’s Autotte. “Even if you assume that the debt ceiling problem is resolved, there are other issues waiting to come to the forefront, such as the U.S. credit rating. So as long as the U.S. uncertainty is there, the Canadian dollar will remain weak.”

The nation’s employers added 15,000 jobs in June, down from 28,400 jobs in May, according to the median of forecasts by 20 economists surveyed by Bloomberg News.

Canada’s dollar has declined 3.3 percent this year versus the currencies of nine other developed nations in the second-worst performance, according to Bloomberg Correlation-Weighted Currency Indexes. The greenback has fallen 7.9 percent and the Japanese yen has lost 2.1 percent of its value.

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