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As uncertainty swells, watch the mighty greenback

Sheets of U.S. one dollar bills roll off the press at the Bureau of Printing and Engraving in Washington, D.C.

With the ink drying on Ireland's bailout package from the EU and IMF, nervous investors will keep the spotlight on Portugal and Spain as the next likely candidates for intervention. The uncertainty is likely to strengthen the maligned U.S. dollar, at least in the short-term, as it remains one of the few havens now that the euro's future has come into question.

Spanish Prime Minister Jose Luis Rodriguez Zapatero said Friday there was no chance Spain would seek a bailout. But observers contend that Spain, as well as Portugal, are vulnerable once the bond vigilantes come sniffing. "Dust off the history of the Asian crisis and you will see that there was no such thing as a firewall or safe harbour once the markets sensed an ounce of blood in the water from any local economy," BMO Nesbitt Burns economist Douglas Porter noted.

A rising greenback, combined with worries about Europe's financial mess tripping up the global recovery, could chill the hot commodity sector. But the effect is likely to be short-lived given that domestic demand from emerging markets, especially Brazil and China, continues unabated.

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Unfortunately, booming commodities exports haven't been enough to fix Canada's growing trade deficit, which appears to be topping 4 per cent of GDP, the highest level in nearly two decades and significantly more than the U.S. measure.

Tuesday's report on Canada's GDP growth in the third quarter is forecasted to show a decline to an annual rate of 1.4 per cent, a decrease from the 2-per-cent gain the previous quarter, due largely to weak exports, but buoyed by consumer and business spending. It's worth noting that Canada's key indicator of economic growth has now fallen below its U.S. counterpart, which showed a 2.5-per-cent gain in the third quarter.

The reversal of fortunes is humbling given how strong 2010 started for Canada's economy and, along with other economic data, it must give currency traders pause to reassess the notion of an at-par loonie.

We will be able to look to our financial services industry this week for some relief. The major banks report quarterly results beginning with National Bank of Canada on Tuesday and ending with Bank of Montreal on Dec. 7.

Figures from the U.S., meanwhile, are expected to reinforce the sense that the world's biggest economy is powering up again. The high unemployment rate of 9.6 per cent has so far kept any such optimism in check, but there are early signs (very early) that the job situation is improving. Economists forecast that non-farm payrolls grew by 140,000 in November, on top of the 150,000 job gains in December. That figure is still short of the monthly 200,000 threshold that experts consider necessary just to handle a growing work force, but things have moved a long way forward from the beginning of the year, when the U.S. economy couldn't even muster 20,000 new jobs a month.

"This is a recovery that is on better footing than it was in [the second quarter]rdquo; says CIBC World Markets' chief economist Avery Shenfeld, adding that data point to fourth-quarter U.S. real GDP growth in the 2.5 per cent range.

Investors and traders will carefully parse comments expected from the U.S. Federal Reserve chairman on Wednesday evening, when he discusses the state of the economy with business leaders. This will be a prime opportunity for Ben Bernanke to comment on the Fed's second round of asset purchases and possibly offer thoughts on whether the full $600-billion (U.S.) earmarked through the end of next June will be required.

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