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Loonie and U.S. dollar

Adrian Wyld/Adrian Wyld/CP

The Canadian dollar closed at par with its U.S. counterpart on Wednesday for the first time in almost six months, even as the U.S. dollar gained strength against other major currencies.

The loonie finished up 0.73 of a cent at exactly 100 cents (U.S.). Although it has broken through parity in intraday trading on a number of occasions, it has failed to sustain any of those advances since April 14.

The U.S. dollar has been weakening amid plans by the U.S. Federal Reserve to inject $600-billion into the U.S. economy by buying bonds in a move called quantitative easing.

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Such an exercise weakens the greenback as it involves the printing of vast amounts of dollars.

The euro, on the other hand, has slid against the U.S. dollar amid investor concern over the government debt crisis in Ireland. Dublin's borrowing costs are rising in the markets on a daily basis amid fears that its will not be able to push through its next round of austerity measures and will be forced to seek help from its partners in the eurozone.

The euro closed at $1.3777 (U.S.) Wednesday, way down from last Friday's multi-month high of $1.4257.

Meanwhile, Statistics Canada on Wednesday reported a sharp deterioration in the country's trade deficit with the world. The deficit rose from $1.5-billion (Canadian) in August to $2.5-billion in September, approaching the record deficit registered in July.

The showing worsened as Canada's merchandise exports declined 1.7 per cent to $33.1-billion in September. Automotive products, as well as consumer and industrial goods and materials were the main factors behind the decline.

Imports increased 1.2 per cent to $35.6-billion, the highest level since November, 2008.

The loonie's rise also came amid a mixed showing in commodity prices following news that China is taking further steps to curb lending and cool an overheated economy. China's central bank has ordered banks to set aside more reserves in a new move to curb lending amid concern about rising inflation.

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A surging Chinese economy has been of particular benefit to commodity prices.

The December crude contract on the New York Mercantile Exchange rose $1.09 (U.S.) to a fresh two-year high of $87.81 a barrel.

But metal prices weakened with the December copper contract in New York down 7 cents at $3.97 a pound. And gold bullion backed away from Tuesday's record close, down $10.80 at $1,399.30 an ounce.

Currency markets were choppy a day before G20 leaders meet in Seoul.

The United States has been criticized by emerging economies over the Federal Reserve's quantitative easing, which they fear will further weaken the U.S. dollar and make American exports cheaper.

China will also likely face criticism, most notably from U.S. President Barack Obama, that its policy of keeping the yuan low to boost exports is causing problems in the world economy.

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CIBC chief economist Avery Shenfeld said in a report Wednesday that he expects the loonie will continue to hang around parity for the rest of this year before weakening in early 2011.

"The strength of the Canadian dollar is more a reflection of the market's distaste of the U.S. dollar right now, which has been pushing ahead, over the last few months, a number of currencies along with commodity prices," he said.

The Canadian currency and other currencies such as the euro have risen substantially this year on the belief that the Fed's quantitative easing would continue to drive the U.S. dollar lower.

But Mr. Shenfeld doubts this trend will continue. He points out that the wave of selling that has weakened the U.S. dollar "reflects the mistaken view that the U.S. Federal Reserve is flooding the world with greenbacks and that quantitative easing is by design a way to debase the dollar by excess supply."

However, Mr. Shenfeld said broad measures of money supply show there's been no surge of U.S. dollars into the market.

"The money created by buying trillions of bonds is simply sitting idle, having been deposited by American banks as excess reserves in their account at the [Fed]" he said.

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