Canadian dollar loses more ground amid emerging market concerns, Fed tapering

Photo: The Canadian Press. All rights reserved.

Canadian dollars are pictured in Vancouver, Sept. 22, 2011. THE CANADIAN PRESS/Jonathan Hayward

TORONTO - The Canadian dollar closed to a fresh 4 1/2 year low Tuesday as the loonie suffered from concerns about the currencies of emerging markets while traders awaited the outcome Wednesday of the Federal Reserve meeting on interest rates.

The loonie was down 0.35 of a cent to 89.64 cents US, its lowest level since mid-July 2009. The currency went as low as 89.47 cents US in the morning.

Markets have been severely buffeted over the last few sessions on concerns about emerging markets, including slowing growth in China, the world’s second-biggest economy.

Markets have also been jittery because of currency turmoil involving the Turkish lira, the Russian ruble and the Indian rupee as investors wonder how they'll be affected by the U.S. Federal Reserve's policy to reduce monetary stimulus.

The Fed’s massive bond purchases over the last few years has resulted in a stream of cheap money into those markets. But now the central bank is cutting back on those asset purchases.

Investors felt reassured after the People’s Bank of China on Tuesday injected more money into the country’s financial markets to ease strained credit conditions.

India’s central bank unexpectedly raised interest rates to prop up its ailing currency and Turkey’s central bank was expected to follow suit at an emergency policy meeting called after the lira hit a series of all-time lows.

The Fed is widely expected to further pare its bond purchases by another US$10 billion a month to $65 billion.

The Canadian dollar has had a tough month, losing more than four cents, partly because of Fed tapering, which has boosted the U.S. dollar against other currencies.

But the loonie has also suffered from a worsening trade picture, weak December job growth and a dovish stance by the Bank of Canada on interest rates.

The downward pressure on the currency is expected to continue for a while yet, which is not a bad thing for the country's export sector.

"Near-term pressure is likely to continue as sentiment favours a weak Canadian dollar and the Bank of Canada is perceived as increasingly dovish," observed Camilla Sutton, chief FX strategist and managing director at Scotiabank Global Banking and Markets.

"However in the second half of the year, a weak dollar combined with a U.S. recovery is a powerful combination for Canada's export sector and the Canadian dollar."

On the commodity markets, oil prices recovered after two days of steep losses with the March crude contract on the New York Mercantile Exchange up $1.69 to US$97.41 a barrel.

March copper on the Nymex was down a cent at US$3.25 a pound while February bullion declined $12.60 to US$1,250.80 an ounce.